Oct. 14, 2022, 11:19 a.m. ET

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To calm the markets, the Bank of England will buy bonds on ‘whatever scale is necessary.’

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Credit...Maja Smiejkowska/Reuters

The Bank of England intervened forcefully on Wednesday to relieve days of market turmoil after the new government’s fiscal plans sent borrowing costs soaring and the British pound sinking to record lows.

In an extraordinary intervention, the bank said it would undertake large-scale purchases of British government bonds in the coming weeks. In addition to bringing down interest rates, the move helped buoy the pound, whose weakening has added to the nation’s inflation worries.

“The purpose of these purchases will be to restore orderly market conditions,” the central bank, which is independent of the government, said in a statement. “The purchases will be carried out on whatever scale is necessary to effect this outcome.”

After the announcement, stocks on Wall Street registered their first gain in more than a week. British stocks closed up slightly.

Bond and currency trading has been roiled since the new Conservative government of Prime Minister Liz Truss announced last week that it would seek to bolster economic growth by cutting taxes, especially for high earners, while spending heavily to protect households from rising energy costs.

The program has drawn criticism from political rivals and many economists, partly because of the extensive borrowing it will require at a time of rising interest rates and high inflation.

The International Monetary Fund, which works to foster global financial stability and monetary cooperation, signaled its alarm on Tuesday when it urged the government to reconsider its plans. It characterized the program as “large and untargeted” and said it was likely to worsen inequality.

But Treasury officials have given no indication that the government will reverse course, deflecting responsibility for the disruption in markets onto Russia’s war in Ukraine.

The Ukraine war and inflation have created challenges for governments and central bankers around the world this year, but the pound has performed particularly badly. Its recent declines make it one of the worst performers against the dollar.

Since the start of the year, the pound has declined about 20 percent against the dollar and about 6 percent against the euro.

Compounding the situation, the government’s sweeping fiscal plan — presented without an independent fiscal and economic assessment — sent investors fleeing from British assets. Traders inferred that the central bank would be forced to raise interest rates quickly, which pushed up short- and long-term borrowing costs, because the economic plans seemed likely to stoke economic demand and add to inflationary pressures.

The sell-off in British assets since Friday, when the government’s plan was announced, has particularly affected bonds with long maturities, the Bank of England said.

“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” it said in a statement. This would lead to a reduction of the flow of credit to businesses and households, it added.

It said bond auctions would take place from Wednesday until Oct. 14. The intervention has also forced the central bank to pivot off its intended course of selling bonds next week, after it bought them to support the economy through the pandemic.

The yield on 10-year British government bonds on Wednesday climbed as high as 4.59 percent — the highest since 2008 — before the central bank’s statement. This week, 30-year yields exceeded 5 percent for the first time since 2002.

After the announcement, bond yields dropped sharply, with the 30-year yield falling by more than a percentage point to just below 4 percent.

“We’ve seen a dramatic reversal, but this is hardly a well-functioning market,” said Richard McGuire, a strategist at Rabobank. “There’s very thin liquidity,” making trading difficult, he added.

Mr. McGuire, who has been a fixed-income strategist for nearly two decades, said he had not seen anything resembling the recent moves in British debt outside of “something phenomenal” like the eurozone debt crisis a decade ago.

The central bank’s statement on Wednesday had echoes of a promise in 2012 by Mario Draghi, then head of the European Central Bank, to do “whatever it takes” to save the euro, which had come under severe pressure in the markets.

The intervention in Britain came after a central bank committee had warned of the risks to Britain’s financial stability from disruption in the government bond market. There had been concern about how the sharp rise in bond yields would affect pension funds, which tend to be large holders of long-dated government bonds.

At issue was a strategy used by liability-driven investment funds, which manage some pensions and have £1.5 trillion in assets. As bond prices plummeted, the investment funds needed to provide more collateral and were forced to sell bonds to raise cash, cementing losses. With so many funds trying to sell bonds into an illiquid market, there was the risk of a downward spiral in prices of government bonds — leaving funds that used this investment strategy potentially insolvent.

The bank said it would buy bonds with maturities of 20 years or more and be willing to buy up to £5 billion per auction. On Wednesday, it bought just over £1 billion worth of bonds.

“The Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for U.K. households and businesses,” the bank’s statement said.

The speed of the rise in bond yields had also disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.

“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in” currency and bond markets, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a research note. “But its actions to date have eroded confidence among global investors, which cannot be easily restored. Accordingly, a painful recession driven by surging borrowing costs lies ahead.”

The market turmoil and the central bank’s intervention reveal the extent to which the government’s plans are at odds with the bank’s monetary policy goals. The government is trying to quickly generate economic demand, while the bank is trying to cool it to lower inflation. Consumer prices rose nearly 10 percent in August from a year earlier, putting the inflation rate at levels unseen since 1982.

On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November. Markets are betting that interest rates will rise above 5 percent early next year, from 2.25 percent.

Just last Thursday, the central bank said it would initiate its plan to sell bonds back to the market — a process called quantitative tightening — as it tried to end the long era of easy money in its fight against inflation. It had insisted there would be a “high bar” for the bank to deviate from the plan, which would over the next year reduce its holdings of bonds by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was postponing the start of sales until the end of October.

Even as the bank tried to differentiate between Wednesday’s effort to ensure financial stability and the bank’s monetary policy stance, the intervention risks worsening the confusion in markets about the central bank’s goals, Mr. McGuire said.

Among the questions, he said, are: “Are we trying to contain inflation? Are we pushing back against a fiscally expansive government? Are we undertaking quantitative tightening?” Or, alternatively: “Are we doing the opposite? Are we adding to the inflationary pressure? Are we simply going to keep buying more bonds?”

The lack of clarity, he said, “doesn’t seem to be a positive in terms of the outlook for U.K. assets.”

In an echo of history, the British pound has lost its dominance.

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Credit...Suzie Howell for The New York Times

Britain’s pound coin — rimmed in nickel and brass with an embossed image of Queen Elizabeth II at the center — could always be counted on to be significantly more valuable than the dollar.

Such boasting rights effectively came to an end this week when the value of the pound sank to its lowest recorded level: £1 = $1.03 after falling more than 20 percent this year.

The nearly one-to-one parity between the currencies sounded the close of a chapter in Britain’s history nearly as much as the metronomic footfalls of the procession that carried the queen’s funeral bier up the pavement to Windsor Castle.

“The queen’s death for many people brought to an end a long era of which the soft power in the United Kingdom” was paramount, said Ian Goldin, professor of globalization and development at the University of Oxford. “The pound’s demise to its lowest level is sort of indicative of this broader decline in multiple dimensions.”

The immediate cause of the pound’s alarming fall on Monday was the announcement of a spending and tax plan by Britain’s new Conservative government, which promised steep tax cuts that primarily benefited the wealthiest individuals along with expensive measures to help blunt the painful rise in energy prices on consumers and businesses.

The sense of crisis ramped up Wednesday when the Bank of England intervened, in a rare move, and warned of “material risk to U.K. financial stability” from the government’s plan. The central bank said it would start buying British government bonds “on whatever scale is necessary” to stem a sell-off in British debt.

The Bank of England’s emergency action seemed at odds with its efforts that began months ago to try to slow the nearly 10 percent annual inflation rate, which has lifted the price of essentials like petrol and food to painful levels.

The swooning pound this week has carried an unmistakable political message, amounting to a no-confidence vote by the world’s financial community in the economic strategy proposed by Prime Minister Liz Truss and her chancellor of the Exchequer, Kwasi Kwarteng.

To Mr. Goldin, the pound’s journey indicates a decline in economic and political influence that accelerated when Britain voted to leave the European Union in 2016. In many respects, Britain already has the worst performing economy, aside from Russia, of the 38-member Organization for Economic Cooperation and Development.

“It’s just a question of time before it falls out of the top 10 economies in the world,” Mr. Goldin said. Britain ranks sixth, having been surpassed by India.

Eswar Prasad, an economist at Cornell University, said this latest plunge had delivered a bracing blow to Britain’s standing. A series of “self-inflicted wounds,” including Brexit and the government’s latest spending plan, have accelerated the pound’s slide and further endangered London’s status as a global financial center.

Dozens of currencies, including the euro, the Japanese yen and the Chinese renminbi, have slumped in recent weeks. Rising interest rates and a relatively bright economic outlook in the United States combined with turmoil in the global economy have made investments in dollars particularly appealing.

But the revival by the Truss government of an extreme version of Thatcher and Reagan-era “trickle-down” economic policies elicited a brutal response.

“The problem isn’t that the U.K. budget was inflationary,” wrote Dario Perkins, a managing director at TS Lombard, a research firm, on Twitter. “It’s that it was moronic.”

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Credit...Suzie Howell for The New York Times

During the more than 1,000 years in which the pound sterling has reigned as Britain’s national currency, it has suffered its share of ups and downs. Its value in the modern era could never match the value of an actual pound of silver, which in the 10th century could buy 15 cows.

Over the centuries, British leaders have often gone to extraordinary lengths to protect the pound’s value, viewing its strength as a sign of the country’s economic power and influence. King Henry I issued a decree in 1125 ordering that those who produced substandard currency “lose their right hand and be castrated.”

In the 1960s, the Labour government under Harold Wilson so resisted devaluing the pound — then set at a fixed rate of $2.80, high enough to be holding back the British economy — that he ordered cabinet papers discussing the idea to be burned. In 1967, the government finally cut its value by 14 percent to $2.40.

Other economic crises thrashed the pound. In the 1970s, when oil prices skyrocketed and Britain’s inflation rate topped 25 percent, the government was compelled to ask the International Monetary Fund for a $3.9 billion loan. In the mid-1980s, when high U.S. interest rates and a Reagan administration spending spree jacked up the dollar’s value, the pound fell to a then record low.

The pound’s dominance has been waning since the end of World War II. Today, the global economy is experiencing a particularly tumultuous time as it recovers from the aftermath of the coronavirus pandemic, supply chain breakdowns, Russia’s invasion of Ukraine, an energy shortage and soaring inflation.

As Richard Portes, an economics professor at London Business School, said, currency exchanges have enormous swings over time. The euro was worth 82 cents in its early days, he recalled, and people referred to it as a “toilet paper” currency. But by 2008, its value had doubled to $1.60.

What might cause the pound to revive is not clear.

The Truss government’s economic program has forcefully accelerated the pound’s slide — the latest in a series of what many economists consider egregious economic missteps that peaked with Brexit.

Much depends on the Truss government.

“The plunge in the pound is the result of policy choices, not some historical inevitability,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “Whether this is a new, grim era or just an unfortunate interlude depends on whether they reverse course or are kicked out at the next election.”

As it happens, the Bank of England is preparing to issue new pound bank notes and coins featuring King Charles III, at the very moment that the pound has dropped to record lows.

“The death of the queen and the fall of the pound do seem jointly to signify decisively the end of an era,” Mr. Prasad of Cornell said. “These two events could be considered markers in a long historical procession in the British economy and the pound sterling becoming far less important than they once were.”

Wall Street rebounds from a week of turmoil.

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Stocks on Wall Street rallied on Wednesday, rebounding from a long stretch of losses as markets in Europe also showed signs of settling down after a week of turmoil. The snapback came after the Bank of England said it would intervene in the British government bond market, after the new government’s budget plans triggered a bout of volatility in stocks, bonds and currency markets.

  • The S&P 500 rose 2 percent, after six consecutive days of losses, the longest losing streak since the beginning of the coronavirus pandemic in February 2020. The index had fallen more than 6 percent during that six-day stretch. The Nasdaq composite also gained about 2 percent on Wednesday.

  • In Europe, the Stoxx 600 rose 0.3 percent, as did Britain’s FTSE 100 Index.

  • In Asia, the Nikkei 225 fell 1.5 percent while Hong Kong’s Hang Seng Index fell 3.4 percent.

  • In the government bond market, the yield on the U.S. 10-year Treasury note, a benchmark for borrowing costs for a wide variety of debt, briefly rose above 4 percent for the first time since October 2008, as investors anticipated that interest rates would rise rapidly as central banks tightened their policies to fight persistent inflation. After its jump, the 10-year yield came down somewhat, to about 3.7 percent.

  • Yields on British government bonds tumbled, meanwhile, after the country’s central bank said it would buy government bonds on “whatever scale is necessary” to restore order in financial markets.

  • The price of West Texas Intermediate crude oil, the U.S. benchmark, rose 4.7 percent to around $above $82 a barrel, building on Tuesday’s gains

Liz Truss’s economic gamble throws markets and her government into chaos.

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Credit...Carl Court/Getty Images

Prime Minister Liz Truss of Britain campaigned as a tax cutter and champion of supply-side economics. But four days after her tax cuts and deregulatory plans stunned financial markets and threw the British pound into a tailspin, her political future looks increasingly precarious as well.

With some experts predicting the pound could tumble to parity with the dollar, economists and political analysts said the uncertainty over Britain’s economic path would continue to hang over the markets and Ms. Truss’s government, reports Mark Landler for The New York Times.

That Ms. Truss should find herself in this predicament so soon after taking office attests to both the radical nature and awkward timing of her proposals. Cutting taxes at a time of near-double-digit inflation, when central banks in London and elsewhere are raising interest rates, was always going to mark Britain as an economic outlier.

  • The International Monetary Fund added to the deepening sense of anxiety when it urged the British government to reconsider the tax cuts.

  • The specter of higher interest rates has caused the housing market to seize up.

  • The Bank of England’s chief economist, Huw Pill, said that the government’s new fiscal policies would require a “significant monetary policy response.”

During the campaign, Ms. Truss modeled herself on Margaret Thatcher, who also announced a series of free-market measures after taking office as prime minister and endured a turbulent couple of years. Unlike Ms. Truss, though, Thatcher worried about curbing inflation and shoring up public finances; she even raised some taxes during a recession in 1981 before reducing them in later years.

But Thatcher came in after an election victory over an exhausted Labour government, which gave her more time to weather the downturn and for her deregulatory measures to take effect. She also got a lift after Britain vanquished Argentina in the Falklands War in 1982, which uncorked a surge of patriotism.

“Thatcher was thinking in 1979 that ‘I only need to give voters something they like by 1982,’” said Charles Moore, a former editor of The Daily Telegraph who wrote a three-volume biography of the former prime minister. “Liz Truss hasn’t got this amount of time.”