Did the Bank of England tank the Truss government?

UK tax

5 Oct

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The downfall of the Liz Truss government in 2022 was triggered by a series of dramatic events, with the Bank of England's actions and Andrew Bailey’s role as Governor receiving significant scrutiny. The market chaos that followed the government's mini-budget can be traced to multiple factors, but key among them was the decision by the Bank of England to sell £40 billion worth of gilts just days before Chancellor Kwasi Kwarteng’s budget announcement. This move sent gilt yields soaring, shaking investor confidence even before the budget was presented.

Kwarteng’s "mini-budget," which included a package of unfunded tax cuts aimed at stimulating growth, stoked fears over the UK's fiscal health. Investors were concerned about the sustainability of government borrowing, and the gilts market, which was already under pressure, saw prices plummet. This situation was worsened by the Bank of England’s pre-budget announcement, which traders interpreted as a sign that gilt prices would continue to fall, sparking a wave of sell-offs that drove yields higher. By the time Kwarteng presented his budget, the market was already destabilised.

Sue Gray, the top civil servant, had also expressed concerns that the Truss-Kwarteng budget would exacerbate the deficit, creating further tension within the government. While the Bank of England’s decision to start selling gilts right before the budget didn’t directly cause the chaos, it certainly amplified market jitters, with some experts blaming the Bank’s failure to communicate clearly. The situation worsened when pension funds, which held leveraged investments in gilts, faced collateral calls, deepening the crisis.

Andrew Bailey faced criticism for his management of the situation. While the Bank eventually stepped in with emergency bond purchases to stabilize the market, Bailey's initial actions, including a public ultimatum to pension funds to “get this done” within days, added to the uncertainty and fueled further market panic. His handling of the situation led to questions about the Bank’s leadership and whether it had miscalculated the market’s fragility.

In the aftermath, Bailey pointed fingers at the government, stating that the mini-budget had damaged the UK's international reputation and caused the markets to lose faith in Britain’s economic stability. Truss’ government, meanwhile, accused the Bank of mishandling inflation and failing to act decisively in the months leading up to the crisis. The combination of a poorly received fiscal plan and the Bank’s missteps led to a crisis of confidence that ultimately brought down the Truss government after just 49 days in office.

In conclusion, while the Bank of England’s decision to sell gilts before the mini-budget wasn’t the sole cause of the market turmoil, it certainly played a critical role in the chain of events that led to Liz Truss’s downfall, underscoring the complex interplay between government policy and central bank actions. It also brings up questions around how much unelected civil servants & their agendas can effect the stability of the UK.

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