Bank of England steps in to calm markets

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29th September 2022

Bite-sized business news from the UK and beyond
Good morning Amid all the news of rising food costs, it's pleasing to learn that not everything is going up in price. While the summer drought diminished some harvests, other produce benefited from the prolonged sunshine, helping to bring down prices for fruit such as strawberries, blueberries and tomatoes. 
Today's stories
  • Bank of England steps in to calm markets
  • Cries of sabotage after leaking gas pipes
Bank of England steps in to calm markets

What happened?
The fallout from the mini budget last week produced another tumultuous 24 hours.

Yesterday started with the IMF criticising the government’s economic plan and ended with emergency action from the Bank of England in a bid to calm financial markets.

The IMF made an unusual public attack on the UK’s plan to implement £45bn of debt-funded tax cuts
The international body acts as a lender for countries facing financial difficulties and flags any concerns it has on global growth. It urged the UK government to “re-evaluate” the plan and warning that the “untargeted” package threatens to stoke soaring inflation. 

The measures announced last Friday represent the most drastic since 1972 when unfunded tax cuts designed at kickstarting economic growth instead lit a fire beneath prices which spiralled out of control and resulted in a recession that required the IMF bailing out the UK in 1976.

This week investors have been selling UK government bonds or gilts sending the interest rate or yield soaring
The Bank of England says this has broken the market and announced it will step in by buying £65bn of gilts to stop yields surging, which increase the government’s borrowing costs. The intervention was especially welcomed by pension funds who hold huge amounts of gilts – as their generally seen as safe investments  - and would have left a big hole in their balance sheets and could have forced them to default.

Nearly 1,000 mortgage products have been withdrawn in the past two days as lenders reassess how to price their loans amid the market volatility.

What’s the government said?
The Treasury has remained defiant and defended the budget adding that it wasn’t to blame for the market turmoil. The chancellor is due to lay out the details of how the government will sustainably finance £45bn of tax in November but given the events of the past week two months feels far away.

Labour is calling for parliament – currently in recess until 11 October for the party conference season - to be recalled early and for the budget to be scrapped.
Other stories to keep you in the loop
  • Chancellor tells bank execs he is ‘working closely’ with Bank of England to calm markets
  • Shoppers hit by record rise in food prices
  • JPMorgan's digital bank Chase UK hits 1m customers
  • Apple slows production of new iPhone after weaker-than-expected demand
  • Lego sales surge but profits held back by rising costs
  • Morrisons profits plunge 50% after ‘unprecedented’ inflation
  • Burberry designer to step down ending five years of Italian control
  • Boohoo blames cost of living crisis for slowdown in global sales as outlook darkens
  • Jeff Bezos' billionaire philanthropist ex-wife files for divorce from second husband
Cries of sabotage after leaking gas pipes

What happened?
This week Danish, German and Polish officials announced that they believe that leaks in Nord Stream 1 and 2 - major pipelines for transporting gas from Russia to Europe - were likely caused by acts of sabotage.

How did we get here?
On Tuesday, Sweden reported two leaks in the Nord Stream 1 pipeline close to the Danish island of Bornholm, mere hours after Denmark reported a separate leak in the Nord Stream 2 pipeline in the same area. 

Neither leaks affect immediate Russian gas exports to Europe as Nord Stream 1 flows had been indefinitely suspended and Nord Stream 2 never even began operations after Germany effectively cancelled it following Russia’s invasion of Ukraine. 

Given the close proximity and timing of the leaks, officials say it’s unlikely they were accidental pinning the blame either implicitly or explicitly on Russia.

Why it’s happening: It’s not obvious who stands to gain from blowing up two non-operational pipelines. But they have been at the centre of a tense energy standoff between Russia and Europe since the war in Ukraine began. The suspected sabotage shows that European infrastructure is now a target. 

Bottom line: Europe now has enough natural gas lined up to make it through winter, per Bloomberg, but this development adds yet another complication to an already volatile situation.
Stat of the day

In the worst-case scenario $70bn of damage is estimate to be caused by Hurricane Ian which would rank as the sixth-costliest hurricane in US history
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