LONDON (AP) 鈥� The Bank of England on Tuesday expanded its emergency effort to quash upheaval on financial markets unleashed by the government鈥檚 plan to slash taxes, saying fluctuations in bond prices posed a .
The U.K. central bank said it will now buy inflation-linked securities 鈥� which offer protection from inflation 鈥� as well as conventional government bonds as it seeks to . Purchases will total up to 10 billion pounds ($11 billion) a day split evenly between both types of bonds, and the program will end Friday as originally planned, the bank said in a statement.
Analysts say pension funds lobbied the central bank to extend the program by two weeks, but Bank of England Governor Andrew Bailey stuck to the timeline in an appearance at the annual meeting of the Institute of International Finance in Washington. He said portfolio managers have three days to rebalance their positions.
The bank broadened the program after yields on government bonds jumped again Monday, returning to the levels reached immediately after the government last month without saying how it would pay for them. That raised concerns about a surge in government borrowing that spooked markets, sending the and endangering pension funds.
The bond-buying program addresses concerns on the so-called secondary market, where investors trade bonds previously purchased from the government. Bond prices tend to fall as concerns about a borrower鈥檚 ability to repay its debts increase. This pushes the yield 鈥� or the return investors realize on their money 鈥� higher because they receive the same interest rate on a smaller investment.
Investors are concerned that the government鈥檚 plans will lead to high levels of debt and , which is already running at a near . The Institute for Fiscal Studies, an independent think tank, said Tuesday that stabilizing government debt levels will require 鈥渄ifficult decisions鈥� on a combination of spending cuts and tax increases.
Pension funds have been particularly hard hit by the turmoil over government spending priorities, with some being forced to sell bonds to cover payment obligations.
While investment funds have made 鈥渟ubstantial progress鈥� in reducing their risks, there were further big moves in government bond prices at the beginning of the week, particularly for index-linked bonds, the bank said.
鈥淒ysfunction in this market, and the prospect of self-reinforcing 鈥榝ire sale鈥� dynamics pose a material risk to U.K. financial stability,鈥� the bank said in a statement.
The market turmoil began on Sept. 23, when Treasury chief Kwasi Kwarteng introduced the in the House of Commons.
The plan includes 45 billion pounds of tax cuts and at least 60 billion pounds of increased spending to help shield homes and businesses from this winter. The government hasn鈥檛 yet detailed how it will pay for the program, except to say faster economic growth will increase tax revenue.
In an effort to ease concerns, Kwarteng said Monday that he would release the government鈥檚 detailed plans on Oct. 31, three weeks earlier than scheduled.
Critics say the government鈥檚 target for average economic growth of 2.5% a year is substantially higher than most economists predict and will be difficult to achieve.
The government may have to cut spending by as much as 62 billion pounds a year to achieve targets for controlling public debt, the IFS said in an analysis released Tuesday.
鈥淩ecent events have illustrated the importance of a credible strategy and plan for fiscal sustainability,鈥� the IFS said. 鈥淛ust as financial markets 鈥� which ultimately have to lend the money required to plug the gap in the government鈥檚 fiscal plans 鈥� might be unconvinced by plans underpinned by an assumption of a miraculous uptick in growth, so too might they be unconvinced by plans underpinned by vague promises of public spending cuts far into the future.鈥�
Danica Kirka, The Associated Press
