June 23, 2024

UK: How government tries to calm markets - The Economy

UK: How government tries to calm markets – The Economy

For Kwasi Kwarteng, the week began last: with a face. The British finance minister does not intend to actually explain how the government’s controversial tax cut plans will be funded until the end of November, but that is unlikely. The pressure from the financial markets was so great that he announced that the date on Monday would be brought forward by almost a month. On October 31, Kvarteng wants to present what markets have long expected from him: a strategy as credible as possible on how to pay for the billion-euro relief package — without pushing government debt to terrifying heights.

Called Kwarteng two weeks ago Development plan Given the government, Great Britain did not rest. The British pound has managed to offset its massive loss against the US dollar, but the situation remains tense. Just how much was shown on Monday when the Bank of England announced it was expanding its program to buy government bonds. The central bank announced that it would no longer buy five billion pounds worth of bonds a day, doubling that amount. The campaign totals £65 billion and expires on Friday.

At the end of September, the Bank of England announced that it would buy more government bonds as needed to ensure financial stability. It was urgently needed after the yield on 30-year British government bonds rose above 5 percent for the first time since 2002 and the pound lost a lot of its value. A five per cent yield means the British government must pay five per cent interest to borrow money for this period in the international financial markets. With its purchases, the central bank ensured that interest rates fell again and the state could borrow more cheaply. Essentially, the Bank of England is implementing the same kind of indirect state funding that the European Central Bank did during the euro crisis.

Many Britons fear they won’t be able to pay off their home loan in the future

The Bank of England also announced that it would set up a so-called pot of money facility to provide banks with a sudden financial crunch to lend to banks. Many companies are reeling from rising interest rates. The same is true for private customers who need to renew real estate loans. Unlike in Germany, most British loan agreements do not run for ten years, but usually between two and five years. So many homeowners worry that the cost of financing their home will increase drastically.

As it turns out, this concern is completely justified. The Bank of England is likely to raise interest rates further from the current 2.25 percent at its next regular meeting in early November. The central bank wants to reduce the inflation rate from the current 9.9 percent. Whether this will succeed is questionable as the government’s economic policy plans are inconsistent with this goal. Prime Minister Liz Truss and her Finance Minister Kwarteng want to stimulate growth with tax cuts.

While both have rolled back the plan to reduce the top tax rate, there are other plans that will keep citizens more money in their pockets. For instance, the basic tax rate will come down from 20 to 19 percent. Along with this, social security contributions and tax breaks for companies have been reduced. All of this is aimed at stimulating consumer demand, however, prices will rise – and thus inflation.

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However, Finance Minister Kwarteng did not want to know anything about it. When he travels to Washington this week for meetings of the World Bank and International Monetary Fund (IMF), he will have to explain his point. The IMF has previously been unusually vocal in its criticism of the British government’s plans. It said London should “reconsider” tax cuts.

While a cut in the top tax rate is not currently on the table, there are other projects whose funding is unclear. Kwarteng must provide answers in Washington. For example, the ratings agency Moody’s warned that Great Britain was risking its reputation for stability.

Kwasi Kwarteng is once again struggling to improve his image, not only on the stage of the international financial world. He is also counted among his own Conservative Party. Some Tories speak only of “quasicases.”