Britain’s pension fundswere on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout.
The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis.
However, the move by Governor Andrew Bailey helped restore some calm to markets, and pensions experts said retirement pots were not under threat. Nevertheless, worries that Mr Kwarteng’s radical mini-Budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds.
On Wednesday night pressure was mounting on the Chancellor to take more action to reassure markets, as Downing Street dismissed any suggestion that he will resign. Senior bankers warned Mr Kwarteng in a crisis meeting on Wednesday morning that his scheduled announcement of “medium-term fiscal plan” to bring public borrowing under control was “way too far away”.
Lord Clarke, Chancellor under John Major, told ITV’s Peston programme on Wednesday night: “I've never known a Budget cause a financial crisis like this, and I think the Government and the Bank of England are still going to have to act to calm it down and get us back to normality.”
Both Liz Truss andMr Kwarteng are planning to speak publicly for the first time in days on Thursday when they give brief TV interviews. Downing Street was moved to dismiss speculation that the Chancellor's job could be at risk after the tumultuous market reaction to his tax-slashing mini-Budget reaction on Friday.
In a further attempt at reassurance, the Treasury let it be known they will be sending letters to all government department heads saying they must find efficiencies and stick within spending limits.
Amid pressure on the Government to help lower income families, Chris Philp, the Chief Secretary to the Treasury, refused to confirm whether benefits would be uprated in line with inflation - a promise Rishi Sunak made as Chancellor.
Asked on ITV on Wednesday night whether he would commit to a 10 per cent rise in universal credit and pensions, Mr Philp said: "I'm not going to make policy commitments on live TV".
Tory MPs publicly and privately spoke of their deep alarm at the financial fallout on Wednesday, with the Conservative MP Simon Hoare saying: “This inept madness cannot go on.”
Sir Keir Starmer, the Labour leader, called for Parliament to be recalled immediately to discuss the crisis. It is not due back until the week after next.
The political backlash is set to overshadow the Conservative Party’s annual conference that starts on Sunday. Rishi Sunak, who lost the Tory leadership contest after warning of the peril of cutting tax amid soaring inflation, has decided not to attend.
The Treasury insisted on Wednesday it would stick by its Friday package in full. Criticism on Tory benches is yet to turn into a fully blown Commons rebellion, with much depending on the coming days.
Kemi Badenoch, the International Trade Secretary, will use a speech in Washington DC on Thursday to double down on the mini-Budget, saying the UK is “going for growth in a big way”.
She will liken the approach to that of Margaret Thatcher, saying: “There is radical change happening on our side of the Atlantic. It’s the kind of radical change that we’ve not seen for 40 years. Addressing the market instability, she will also say: “We must look at all of this in the context of the fundamentals which are that the UK economy is strong.”
The Daily Telegraph can reveal that one of Ms Truss’s most prominent economic supporters and informal advisers warned Government figures of the danger of spooking the markets with the mini-Budget.
Gerard Lyons told The Telegraph: "I did warn them quite explicitly about the need to be aware of the febrile state of the markets, how they needed to make sure the markets fully understood what they were doing and that they mustn't spook the markets. I did this a week and a half before the mini-Budget and again in the days right before the statement.”
The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its balance sheet. Instead for 13 days it will revert to buying them at a rate of £5bn per day using newly created money in a process known as quantitative easing.
The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.
There were growing fears that the fallout from the mini-Budget could deepen a recession rather than boost growth as it was intended to. The Bank said the crisis in markets threatened a “tightening of financing conditions and a reduction of the flow of credit to the real economy”.
Mortgage providers withdrew a record number of offers and big companies were facing their highest ever borrowing costs, marking a sharp turnaround from the situation of recent years in which cheap money was readily accessible.
Senior business figures criticised the Government. Michael O’Leary, the chief executive of Ryanair, said the Government’s spending plans are “nuts” and claimed “they could bankrupt the UK economy in the next two years”.
Advertising boss Sir Martin Sorrell told Bloomberg TV that the mini-Budget was “like a CEO and CFO reducing revenues and increasing costs without a plan.”
However, Tony Danker, director general of the Confederation of British Industry, struck a conciliatory tone and praised Liz Truss’s goal of boosting economic growth to 2.5pc. But he said it is critical to address the inflation crisis and the turmoil in markets first.
“The Chancellor must use every opportunity to show that he and the Bank of England are coordinating on inflation and that he has a robust plan to pay down debt in the medium-term,” Mr Danker said.
“Every day, every week, every month, the Government will now be critiqued by markets and businesses on how serious they are about growth and about their fiscal responsibility to pay back debt.”
Traders trimmed back their predictions for interest rate rises, anticipating the base rate will rise to 5.75pc next year. Such a level would be very high by recent standards, but below the 6pc or more anticipated before Mr Bailey began buying bonds.
Samuel Tombs at Pantheon Macroeconomics said jumping from 2.25pc now to 6pc early next year “would imply that many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability”.
