# Explainer-Why is Bank of England acting again? What next in the UK crisis?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-28
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Bank of England emergency bond buying to reduce financial chaos
Meta Description: Learn why the Bank of England had to step in to buy bonds amid financial chaos triggered by Liz Truss's tax decisions. Find out the potential impact on
URL: https://financedigest.com/explainer-why-is-bank-of-england-acting-again-what-next-in-the-uk-crisishtml

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LONDON (Reuters) – Britain’s central bank resorted to buying bonds again on Wednesday in an emergency move to reduce the chaos in financial markets which was triggered last week by the tax and spending plans of new British Prime Minister Liz Truss.

The slump in government bond prices – and the subsequent surge in yields – has threatened to wreak havoc in the country’s pension industry, hurt the housing market and increase the recession risks for the broader economy.

Following is a summary of key questions raised by the upheaval in financial markets.

WHY IS BRITAIN [FACING ANOTHER FINANCIAL CRISIS](https://www.financedigest.com/estonias-pro-kyiv-government-faces-election-test-amid-cost-of-living-crisis.html "Estonia’s pro-Kyiv government faces election test amid cost of living crisis")

Investors were already worried about the huge cost of the tax cuts and [energy](https://www.financedigest.com/britains-tax-take-risks-blowing-green-energy-off-target.html "Britain’s tax take risks blowing green energy off target") subsidies promised by Truss even before her finance minister Kwasi Kwarteng announced more cuts to taxes last Friday.

Rather than heed Kwarteng’s promises of stronger economic growth, investors took fright at the prospect of higher inflation [caused by the tax cuts which they saw as forcing the Bank](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") of England to speed up its interest rate increases.

Sterling slumped, adding to [inflation pressure](https://www.financedigest.com/analysis-china-central-bank-under-pressure-to-ease-is-hemmed-in-by-inflation-fed-jitters.html "Analysis-China central bank, under pressure to ease, is hemmed-in by inflation, Fed jitters") in a country that relies on imports for its fuel, food and other products. Even more worryingly for the BoE, [yields on government bonds](https://www.financedigest.com/stocks-fall-bond-yields-rise-as-focus-shifts-to-fed-rate-outlook.html "Stocks fall, bond yields rise as focus shifts to Fed, rate outlook") leapt, especially on long-term debt, threatening to cause problems in Britain’s pensions industry.

WHY IS THE [BANK OF ENGLAND](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure") BUYING BONDS AGAIN?

By buying bonds, the BoE is [seeking to reverse what it sees as “dysfunction” in the bond](https://www.financedigest.com/investors-seek-higher-returns-as-catastrophe-bond-issuance-slows-during-q2-according-to-aon-study.html "INVESTORS SEEK HIGHER RETURNS AS CATASTROPHE BOND ISSUANCE SLOWS DURING Q2, ACCORDING TO AON STUDY") market. Specifically, the central [bank was seeking](https://www.financedigest.com/seven-out-of-ten-uk-adults-aged-25-44-never-seek-advice-on-dealing-with-debts-despite-depending-on-the-bank-of-mum-and-dad.html "Seven out of ten UK adults aged 25-44 never seek advice on dealing with debts despite depending on the bank of mum and dad") to address problems facing pension funds, a source familiar with the decision said.

The [funds are very sensitive to sudden drops in long-dated bond prices and in extreme market conditions a vicious cycle](https://www.financedigest.com/oiling-the-wheels-for-a-smooth-funding-cycle.html "OILING THE WHEELS FOR A SMOOTH FUNDING CYCLE") of forced sales and further price falls can set in.

By temporarily acting as a buyer for the bonds, the BoE aims to prevent panic selling.

But the buying programme is different to the one the BoE launched during the 2020 COVID-19 pandemic, after the Brexit referendum and following the 2008-09 [financial crisis](https://www.financedigest.com/biggest-uk-house-price-fall-recorded-since-financial-crisis.html "Biggest UK house price fall recorded since financial crisis"), as it is only designed to be very short term.

WHAT CAN TRUSS AND KWARTENG DO NOW?

Truss promised to smash the economic “orthodoxy” in her bid to become leader of the Conservative Party and Kwarteng’s tax [cut announcements last week](https://www.financedigest.com/meta-plans-to-cut-thousands-of-jobs-as-soon-as-this-week-bloomberg-news.html "Meta plans to cut thousands of jobs as soon as this week – Bloomberg News") represented a doubling down on the pledges she made during the campaign.

After the shock reaction of markets, some [investors have said the only way](https://www.financedigest.com/5-ways-that-start-ups-can-attract-investors.html "5 Ways That Start-Ups Can Attract Investors") the new government can regain their confidence is by reversing the tax cut plan, something Truss and Kwarteng have shown no sign of doing.

Instead, Downing Street [says there will be more announcements of reforms](https://www.financedigest.com/boes-bailey-says-bank-reforms-worked-but-questions-about-liquidity-buffers.html "BoE’s Bailey says bank reforms worked but questions about liquidity buffers") to improve the growth potential of Britain’s economy – which are likely to involve attempts at cutting back planning rules, changes to the immigration system and more investment in training and infrastructure.

WHAT DOES ALL THIS MEAN FOR THE [HOUSING MARKET](https://www.financedigest.com/uk-housing-market-keeps-momentum-but-slowdown-ahead-halifax.html "UK housing market keeps momentum but slowdown ahead: Halifax")?

Mortgage lenders have scrambled to keep up with wild swings in the sterling [funding markets](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") that determine what mortgage rates they offer to homeowners.

Some lenders temporarily stopped issuing mortgages to new customers and others ramped up repayment rates for new [loans to levels likely to stretch millions](https://www.financedigest.com/britains-lloyds-racks-up-350-million-of-likely-scam-covid-loans.html "Britain’s Lloyds racks up 0 million of likely scam COVID loans") of existing homeowners and make new mortgages unaffordable for many others.

Mortgage deals for new customers now feature rates at around 5%-6% – a steep increase from the norm of around 2% for the last five years which is prompting rising concern of a collapse in the [property market](https://www.financedigest.com/2017-spanish-property-market-gems-kyero-com-gazes-into-the-crystal-ball.html "2017 Spanish property market gems – Kyero.com gazes into the crystal ball") further down the line.

WHAT IS UP, OR DOWN, WITH THE POUND?

Sterling regained some ground against the U.S. dollar on Wednesday, having fallen sharply after the BoE’s announcement, but it is still down about 6% since the start of September, roughly twice as much as the euro.

That means Britain will face more currency-induced inflation pressure than its [European peers at a time when its inflation rate](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") is the highest among the big Group of Seven economies. Investors are betting that the [BoE pushes up interest rates](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk") to almost 6% by May, much higher than their current 2.25% level.

Many exporters have failed to [see much of a boost](https://www.financedigest.com/jd-sports-sees-bills-free-young-shoppers-boosting-profits.html "JD Sports sees bills-free young shoppers boosting profits") from previous weakness in the currency as they often have to buy raw material and components from abroad. A weaker pound could [boost Britain’s](https://www.financedigest.com/britain-seeks-to-boost-banking-services-from-fintechs.html "Britain seeks to boost banking services from fintechs") tourism industry but will make it more expensive for Britons to travel abroad.

(Writing by William Schomberg, David Milliken and Andy Bruce; editing by David Evans)


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