No Quick Fix for UK Economy

The Bank of England (BOE) continues to struggle to contain a crisis kindled by the UK government’s ill-advised plans to borrow lavishly to fund tax cuts. Fears remain that the country’s financial markets could once again spin out of control.

Almost three weeks after Finance Minister Kwasi Kwarteng revealed his much-maligned plan to kickstart the economy, causing an investor uproar, the UK bond market and the British pound remain under immenseduress, despite three major interventions by the central bank.

Yields on benchmark 10-year UK government bonds rose above 4.59% on Wednesday, close to where they were after last month’s disastrous mini-budget reveal. The yield on 30-year bonds also surged above 5%. When bond prices fall, yields rise, making borrowing more expensive.

The BOE is single handedly trying to restore the UK government’s lost credibility in markets, though the instruments at its disposal are not designed for this kind of work.

The central bank’s announcement on September 28 that it would buy bonds through October 14 initially calmed the chaos. Yet market conditions have started to slide again in recent days as pension funds sell what they can to refill their reserves before the program ends.

Additional support for markets announced this week have so far not had the desired effect, with calls pouring in for the BOE to do more to help avert another financial market meltdown. The question is now whether it should extend the $72 billion bond-buying program beyond its Friday end date.