IMF steps up criticism of mini-budget after ‘disorderly’ rise in borrowing costs – as it happened

That’s all for today, after a busy, and worrysome session.

The IMF has suggested the government should change course over the mini-budget, the IFS warned of a £62bn black hole in the UK public finances finances, and the Bank of England was forced to broaden its attempts to keep order in the markets.

Consumers have been hit by rising grocery costs, leading some families to buy cheaper products such as own-brand goods and ‘wonky’ fruit and veg, while petrol prices are on the rise again.

A sharp rise in the number of people unable to work due to illness has pulled the unemployment rate down.

Stock markets had a bad day as the IMF cut its growth forecasts.

And long-dated UK bond yields have risen again – the 30-year gilt is yielding almost 4.8% tonight, the highest since the Bank of England began its attempts to cool the panic.

Here’s today’s main stories:

11 Oct 202212.04 EDT

Phillip Inman

The crisis in the pensions sector over the use of liability-driven investing (LDI) schemes to hedge risks shows how the City never seems equipped to handle the next big financial hazard, my colleague Phillip Inman writes.

He points out that former Bank of England chief economist Andy Haldane warned in 2014 that financial activity will migrate outside the banking system, creating new risks which are now playing out.

And the Bank’s efforts to stem the panic is also causing confusion, he adds:

Most analysts have accused Kwasi Kwarteng of triggering the chaos with his mini-budget. But investors have also been spooked by the Bank of England’s attempts to go back to a more normal world – one where it stops printing money through quantitative easing, a mainstay of economic policy since the financial crisis, and prepares to sell back to investors all that government debt it has bought.

The markets are spooked because the Bank has delayed the start of a programme to sell £100bn of government bonds, but not withdrawn it. Winding back quantitative easing would mean the Bank is both buying government bonds – to help pension funds – and selling them.

Until Threadneedle Street ends this obvious contradiction, another embarrassing episode is set to be added to British financial history. Until the regulators seek out risk wherever they find it, these financial blow-ups are going to continue.

Back in parliament, Labour’s Rachel Reeves accused Kwasi Kwarteng of being in ‘dangerous state of denial’ over the impact of mini-budget.

My colleague Andrew Sparrow has the details:

Reeves, the shadow chancellor, asks if Kwarteng and his team are the last people on earth who think the growth plan is working.

Kwarteng says the IMF has said the tax cuts will boost growth. He accuses Labour of being part of the anti-growth coalition.

Reeves says Kwarteng is in a “dangerous state of denial”. Mortgages could go up by £500 per month. Will the chancellor reverse the budget?

Kwarteng challenges Labour to say which tax cuts it would reverse. And he says Reeves should get her facts right. The IMF says the tax cuts will help growth*, he says.

* reminder, the Fund says the mini-budget will “lift growth somewhat above the forecast in the near term”, but also make it harder to fight inflation (meaning higher interest rates, which slows growth).

Another bad day in the City has ended with blue-chip stocks in the red.

The FTSE 100 index has closed 74 points lower at 6885 points, down 1% today.

Worries about a global downturn, turbulence in the UK bond market, the Ukraine war, and rising Covid cases in China all hit stocks.

Online grocer Ocado was the top faller, down 5%, as tech stocks were hit by expectations of further interest rate rises. Pension providers and other financila stocks suffered from worries about the gilt markets, while miners and oil companies were hit by recession fears.

Michael Hewson of CMC Markets sums up the day:

Today’s mood on European markets has been a predominantly downbeat one, with weakness in Asia translating into a negative open, as concerns over slowing global growth and persistently higher inflation, kept up the pressure on valuations.

Losses accelerated as US markets opened with the IMF adding to the negative tone by downgrading its global growth forecast for next year to 2.7%, while admitting that its target could fall further if economic conditions continue to deteriorate. Its chief economist Pierre Olivier Gourinchas said the worst is yet to come, and that 2023 could be a very bad year. The fund also warned that inflation is set to rise further and could peak sometime later this year, suggesting the need for more rate rises.

A rise in covid cases in China also weighing on risk appetite with the usual suspects of basic resources and energy acting as the largest drag, as concerns over a possible global recession weigh on risk.

Amongst the biggest fallers on the UK market have been the likes of Legal & General, Aviva and Prudential after the Bank of England intervened further in UK government debt markets. Their warnings of market dysfunction, while driving yields lower is making investors a little more nervous about this area of the market. Asset managers are also lower with St. James Place and Hargreaves Lansdown near the bottom of the UK index.

11 Oct 202211.25 EDT

IMF steps up criticism of mini-budget, saying 'change of policy' would change yields

Larry Elliott

The IMF has stepped up its criticism of Kwarteng’s mini-budget, saying it contributed to disorderly markets.

Tobias Adrian, the Fund’s Financial Counsellor, says the fiscal statement last month had led to perceptions that the Bank of England would need to raise rates higher to fight inflation, and that a different fiscal policy would take pressure off the Bank.

Adrian has told a press conference at the IMF’s Annual Conference in Washington DC that some of the rise in interest rates has been “disorderly”, while the “rapid” increase in gilt yields that forced the Bank to act.

Adrain said:

“A change in fiscal policy would change the trajectory of interest rates going forward.

The change in fiscal policy changed the expectations of monetary policy and meant the Bank of England would have to raise interest rates that much more to bring inflation back to its mandated target.”

Adrian’s comments follow the IMF’s warning that Kwasi Kwarteng’s mini-budget would make it harder to fight inflation, while also lifting growth in the near-term….

…and the warning that central banks tightening monetary policy as governments cut taxes is like “having a car with two people in the front”, battling for the wheel.

The Bank of England has bought £1.363bn of conventional long-dated UK government bonds, in its latest daily operation to calm markets.

That’s on top of the £1.9bn of inflation-linked gilts it bought from investors (see earlier post) and means the central bank has stepped up the pace of its efforts to keep markets functioning.

Confirmation that the Bank of England’s latest intervention hasn’t calmed markets much:

Back in parliament, Kwasi Kwarteng has said the government is committed to work with regulators to understand what has happened to the market for long-dated British government bonds in recent weeks.

Kwarteng told MPs:

“We will be absolutely committed to getting to the bottom of what’s happened in the …long-dated gilt market where it’s been over-levered over the last few weeks.”

That ‘over-leverage’ was driven by pension funds who had used LDI strategies to (they thought) protect themselves from adverse moves in interest rates. They faced energency collateral calls on those contracts when bond prices fell, triggering a sell-off that risked a ‘doom loop’.

But the trigger was the shock of Kwargent’s £45bn of unexpected tax cuts, without a credible plan to pay for them, during the worst year for bonds in decades, and when rising inflation was already pushing up interest rates.

Kwasi Kwarteng has destroyed his ‘fiscal credibility’, while the Bank of England’s monetary credibility is also at risk as it tries to maintain order in the bond market.

That’s the damning verdict of Charles Hepworth, investment director at GAM Investments, who warns that the markets still don’t believe the mini-budget is sustainable.

Hepworth says:

“Having been forced to step into the gilts market last month, The Bank of England has had to again foray into the index-linked end of the market as prices in these bonds come under ever increasing pressure. Having destroyed all fiscal credibility, Chancellor Kwarteng’s budget is still viewed by markets as unsustainable.

Even with his fiscal plan and the OBR’s economic forecast announcement being hastily brought forward early to October 31^st, faith in his competence couldn’t get any lower.

“While the Bank of England had to state today that threats of ‘fire sales’ in the gilt market pose a risk to UK financial stability, this acknowledgement cannot be what the government wants to hear. Markets similarly are behaving in a fait accompli fashion, suggesting the BoE has limited tools to avert these ‘fire sales’.

The UK’s 30-year bond is down 23% over the last month, and it is now close to where it fell to just before the Bank was forced to intervene, suggesting monetary credibility is close to being lost. This needs to be sorted as soon as possible or wider cracks will start to build, but credibility is very difficult to restore once lost.”

The Bank of England has bought almost £2bn of inflation-linked bonds today, hours after adding them to its emergency purchase operation.

The BoE accepted offers for £1.947bn of index-linked gilts, and rejected £466m of other offers [under the auction, it can choose which offers to accept to maintain orderly markets].

That’s a step-up in its bond buying. Until this week, the BoE had only bought £5bn of bonds in total, despite having a daily limit of £5bn (raised to £10bn yesterday).

Prices of long-dated linker bonds mostly turned negative on the day after the results of the operation were announced, Reuters reports.

Over in parliament, Chancellor Kwasi Kwarteng has been facing MPs for the first time since his mini-budget caused mayhem in the markets, at Treasury questions.

Mel Stride, the Conservative chair of the Commons Treasury committee, suggested to Kwarteng that he should only announce measures in his fiscal plan due on 31 October if he is confident that he will be able to get them through the house.

Kwarteng replied that:

“We will and should canvass opinion widely ahead of the publication of the plan.”

The chancellor also said Stride is doing a “brilliant job” and has offered “wise counsel”.

However, our Politics Live blogger Andrew Sparrow reports that Kwarteng does not sound 100% sincere at this point – as Stride has been one of his strongest Tory critics.

There’s full coverage here: