The Bank of England stepped in to calm markets after some types of pension funds were threatened with collapse.
It said it would buy as many government bonds as needed after Friday’s mini-budget sparked turmoil in financial markets and the pound plummeted.
Investors had been demanding a much higher yield on investing in government bonds, causing some to halve in value.
Pension funds that invest in bonds were forced to start selling, sparking fears of a renewed market downturn.
The bank said its decision to buy government bonds at an “urgent pace” was driven by concerns about “a material risk to UK financial stability”.
The government borrows money to fund its spending plans by selling bonds, or “gilts,” to investors such as pension funds and big banks in the international markets.
The pound hit a record low on Monday after the Chancellor’s mini-budget, which pledged $45 billion worth of tax cuts as part of a plan to boost economic growth.
The level of government borrowing required had shocked investors, who questioned the sustainability of public finances.
UK government bond markets and equity markets, which had previously fallen sharply, stabilized after the bank’s announcement and the pound also rose modestly.
The government has insisted it will stick to its plan despite growing criticism.
Finance Secretary Andrew Griffith said on Wednesday that his tax cuts are the “right plans” to boost the UK economy.
He said the Bank of England “did its job” by announcing it would buy government bonds to stabilize the economy.
It came after the International Monetary Fund openly criticized the plans, warning that the measures would likely fuel the cost-of-living crisis and widen inequality.
Labor leader Sir Keir Starmer accused the government of “losing control of the economy”.
“The government must now recall parliament and abandon this budget before any more damage is done,” he said.
While the government says it will not reverse its tax cuts, it has promised to unveil more plans to boost growth and reduce public debt on November 23.
In a statement, the Treasury said it would continue to work closely with the bank “in support of its financial stability and inflation goals”.
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