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Truss, Liz

UK Economy on Brink of Collapse as Rift between Government and Central Bank Deepens

Strategic Insights

— 1 min read

The UK economy teeters on the edge of chaos as the rift between the government and the Bank of England (BoE) grows deeper. The BoE is struggling to clean up the mess left by Liz Truss's government's "mini" Budget, which announced the biggest tax cuts in 50 years. The central bank's attempts to restore financial stability have been hindered by its own messaging, exacerbating the crisis. Fundamentals affecting the British economy, including steep energy costs and the end of free money and low interest rates, are common problems shared by other countries.

Key Takeaways:

  • The UK 10-year borrowing costs are near those of Italy, indicating a significant increase in interest rates, making borrowing more expensive.
  • The BoE has intervened twice more, introducing a new repurchase facility and extending bond-buying to index-linked government debt for the first time.
  • Pension funds have called for more time to stabilize the market, but BoE Governor Andrew Bailey has stressed that intervention is temporary.
  • The BoE's emergency measures are sticking plasters at most, and restoring confidence in the sustainability of UK finances will require a more substantive rowing back by the government from its promised tax cuts.
  • There are concerns over whether the BoE's duties to protect both price and financial stability are in conflict.
  • The BoE's credibility is at risk if it fails to restore financial stability in the face of the ongoing crisis.

Statistics:

  • The BoE has bought £13.7 billion of gilts since October 14, with £4.4 billion of that being bought on Wednesday alone.
  • The UK 10-year borrowing costs are near 4%, similar to those of Italy.
  • The BoE's emergency measures were introduced two weeks ago, and are set to end tomorrow.

Sources:

  • Condé Nast Digital Inc.
  • The articles "Britain's Concealed Crisis" by Condé Nast Digital Inc., October 25, 2022
  • "UK economy: Bank of England meets on emergency bond-buying plan", BBC News, October 13, 2022

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