Kwasi Kwarteng said this morning that the Bank of England’s intervention in the gilt market last week had “nothing to do” with the tax measures in his mini budget.
But that’s at odds with what a senior Bank of England economist said just a few days ago.
Let’s take a look.
What did the Bank do?
Gilts (also known as government bonds) are basically an “IOU” issued by the government, promising to pay the owner a sum of money in the future.
If the government wants to borrow money, it issues more gilts.
In the days after Kwasi Kwarteng announced a load of tax cuts – some expected, some not – on 23 September, the price of UK gilts plummeted.
The markets were apparently worried about how much extra borrowing the new chancellor was committing to.
More borrowing means the government has to issue more gilts. With an increased supply, the value of each individual gilt would go down.
Traders didn’t want to hold on to their gilts if they expected them to fall in value in the future – so they sold them. That meant the supply rose anyway, and the value of each one dropped.
This was a big problem for pension funds, which rely on gilt prices remaining stable.
When gilt prices decline as they did last week, pension funds risk falling into a “doom loop” – a vicious cycle of price drops, fire sales and financial instability which could ultimately lead to their collapse.
The Bank of England was so worried about this that it stepped in and said it would buy back up to £65bn of gilts from the markets.
What caused gilt prices to fall?
To be fair to Mr Kwarteng, the UK gilt market, along with other countries’ bond markets, has been on rocky ground for several months due to factors largely beyond the government’s control.
But the chancellor seemed unable to accept this morning that his mini budget even played a part in the latest crisis.
“What happened in the gilt market has got nothing to do with that,” he told LBC’s Nick Ferrari, adding later that “that was a different set of issues, Nick, from the tax measures that we announced in the mini budget”.
Yet the Bank of England disagrees.
Chief monetary economist Huw Pill said last week that the recent round of “fiscal announcements” – i.e. the mini budget – was one of the reasons the gilt price had dropped so low.
In other words, the government’s mini budget did contribute to the problem that the Bank of England had to step in and fix.
A Treasury spokesperson told FactCheck: “There is no doubt that global financial markets have seen significant volatility in recent weeks, with all major currencies wrestling an incredibly strong US dollar. Like many other countries, the UK is not immune from that disruption.”
Kwasi Kwarteng said his mini budget had “nothing to do” with the collapse in gilt prices last week. But a top Bank of England economist says it was a contributing factor.