MercoPress. South Atlantic News Agency

Bank of England to the rescue of first stumble of PM Truss economic program

The Bank of England calmed financial markets by announcing it would buy £65bn of UK government bonds or “gilts”

Britain's central bank on Wednesday warned that dwindling confidence in the economy poses a significant risk as it took the unusual step of intervening directly in financial markets. The move was aimed at restoring financial stability in markets shaken by the Liz Truss government fiscal policies.

At the end of the day and on Thursday early trading stock markets in Asia and the US had risen after the Bank of England said it would buy £65bn of UK government bonds.

Investors demanded higher returns on government bonds, or “gilts,” causing some to slide in value.

Speaking in New York on Wednesday, new UK trade secretary Kemi Badenoch defended the government's economic policies.

Meanwhile Hong Kong's benchmark Hang Seng index was 1.2% higher, while Australia's ASX 200 rose by 1.8% and South Korea's Kospi gained 1%.

That came after New York's main stock indexes rebounded from a six-day losing streak to end Wednesday's trading day around 2% higher.

In morning Asia trade, the pound was 0.9% lower at US$1.08, after earlier making strong gains on the Bank of England's bond-buying announcement.

The currency hit a record low on Monday after chancellor Kwasi Kwarteng announced plans to cut taxes funded by borrowing.

The Bank of England is focusing its actions on long-term government debt, where yields have soared in recent days. That effectively means an increase of interest on public sector debt — pushing up government borrowing costs.

In a statement, the bank said it was necessary to act now to prevent further deterioration after the UK government said it would slash taxes for the wealthy and ramp up borrowing.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” according to the bank. “This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”

The intervention came just five days after the Liz Truss government unveiled an economic stimulus program that included 45 billion pounds (US$48 billion/€50 billion) in tax cuts. The government also wants to spend billions to help households and businesses deal with soaring energy prices.