Bank of England in £65bn scramble to avert financial crisis

The Bank of England has been forced into emergency action to halt a run on Britain's pension funds after the impact of Kwasi Kwarteng's ill-received mini budget prompted fears of a 2008-style financial crisis.

Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor's statement had left it with no choice but to intervene to protect the UK's financial system.

City sources said the surprise move, less than a week after Kwarteng's unfunded tax giveaways, was needed to halt a "doom loop" in the bond markets that risked draining pension funds of cash and leaving them at risk of insolvency.

The Bank was concerned that it threatened the financial health of Britain's biggest pensions and insurance companies, which together manage trillions of pounds of people's cash.

In a reversal of a policy position announced on the day before Kwarteng's fiscal event, the Bank said it was setting aside £65bn to buy bonds over the next 13 working days to ease pressure on pension funds and insurance companies.

Liz Truss was facing calls from jittery Conservative MPs on Wednesday to sack Kwarteng or face a mutiny after the Bank of England's emergency intervention prompted comparisons with Black Wednesday, the day in September 1992 when John Major's Tory government was humbled by speculators led by George Soros.Tory MPs claimed that Kwarteng would have to resign for the party to survive the financial crisis as they urged the prime minister to reverse her plan to scrap the top 45p tax rate, which they said had gone down badly with the public.

Labour leader Keir Starmer accused the government of "losing control of the economy" and called for parliament to be recalled ahead of the Conservative party's annual conference in Birmingham this weekend.

In an interview on Sky News on Wednesday night, the Treasury minister Chris Philp insisted the government would not reverse its proposals and defended the move to cut the top rate of tax.

Speaking to ITV's Peston, he also confirmed that ministers had not decided whether state pensions and universal credit will be uprated in line with inflation this autumn, which had been promised by Rishi Sunak when he was chancellor.

The Bank said it had become alarmed at the turbulence in the markets after the chancellor's mini-budget last Friday, and has been particularly concerned at the sell-off in government gilts, the bonds it floats to cover its borrowing.

"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.

"In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses."

It comes as the crash in the government bond market brought some pension funds close to running out of cash, as they faced demands to meet margin calls on complex derivatives they had bought to cover their pensions liabilities.

Interest rates on government bonds, or gilts, have risen sharply since the chancellor's £45bn package of tax cuts - making it punitively expensive for thousands of pensions funds to fund their hedging activities.

Officials in the Financial Services Group of the Treasury were at an away day - said to have been held at the Oval cricket ground in London - on Wednesday, but returned to their desks that afternoon. A source said they were not working on the response to the Bank of England's announcement.

The Bank's action helped provide Kwarteng with some respite from the financial markets after three days of turmoil that has seen sterling hit its lowest ever level against the dollar, strong criticism of the mini-budget from the International Monetary Fund, about 1,000 mortgage products pulled and interest rates on UK government bonds hit their highest level since 2008. Bond yields fell while the pound recovered in the currency markets after Threadneedle Street's announcement.

But the political pressure on Kwarteng continued to mount. Simon Hoare, the Tory MP for North Dorset, tweeted: "In the words of Norman Lamont on Black Wednesday: 'Today has been a very difficult day'. These are not circumstances beyond the control of govt/Treasury. They were authored there. This inept madness cannot go on."

The Tory chair of the Treasury select committee, Mel Stride, said the party must try to avoid a political crisis on top of an economic one. "The question is whether the plan is going to succeed. It's had an adverse reaction from the markets," he added.

Downing Street insisted that the prime minister was standing by her chancellor, as sources said the Treasury was moving to squeeze Whitehall departmental spending to help placate market concerns about how it planned to balance the books.

A spokesperson told the Guardian: "The PM and the chancellor are working on the supply side reforms needed to grow the economy which will be announced in the coming weeks."

Starmer said: "I think many people will now be extremely worried about their mortgage, about prices going up, and now about their pensions. The government has clearly lost control of the economy. What they need to do now is recall parliament and abandon this budget before any more damage is done."

Kwarteng and Truss were not prepared to comment publicly to calm the markets and reassure the public. Instead, they sent out Treasury financial secretary Andrew Griffith who argued that "all major economies" are experiencing the same volatility as the UK as a result of Russia's war in Ukraine.

The prime minister is scheduled to do a round of eight local BBC radio stations on Thursday morning, with each getting five minutes, before a traditional pre-conference sit-down with regional TV.

A Treasury spokesperson said: "Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions. These purchases will be strictly time limited, and completed in the next two weeks.

"The chancellor is committed to the Bank of England's independence. The government will continue to work closely with the Bank in support of its financial stability and inflation objectives."