“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” the Bank of England said in a statement.
The bank said that the purchases to “restore orderly market conditions,” would be “carried out on whatever scale is necessary to effect this outcome.” It also said it was time-limited to two weeks.
Truss, who is just three weeks into the job, is trying to change the British economy with bold — some would say risky — actions that have spooked investors. Truss has made no secret of her free-market views. During the leadership campaign to replace Boris Johnson as prime minister, she said that she would be a tax cutter from the get go.
On Friday, she delivered on that promise with the government announced huge tax cuts and a big jump in borrowing. The plans include the abolition of the top income tax rate of 45 percent for people earning more than 150,000 pounds and a scrapping of the cap on banker bonuses.
The markets gave their early verdict: On Monday, the pound sterling fell to an all-time low against the U.S. dollar, slumping to 1.03 at one stage before recovering somewhat. Some economists have said that the pound could drop to parity with the dollar.
On Wednesday morning, the pound slid back to 1.06 after reaching 1.08 on Tuesday.
“This, unlike other fluctuations in the market, is a self-inflicted wound,” said Keir Starmer, leader of the opposition Labour Party, told the BBC on Wednesday morning. His party is up 17 percentage points, according to a recent YouGov poll. This is the party’s biggest lead against the Conservatives since 2001, when the Labour leader Tony Blair won a landslide victory.
Truss will have to call a general election by January 2025 and is keen to put her ideas on the economy into motion.
On Tuesday, the International Monetary Fund issued a rare rebuke of the new British government’s handling of its economic policy.
In an unusually blunt statement, it said that it was “closely monitoring” the situation in the U.K., adding the government’s plans will likely “increase inequality.” Untargeted fiscal packages, it said, were not recommended during a period of high inflation.
Truss and her chancellor, Kwasi Kwarteng, have defended their vision for the economy.
“They are prepared to risk unpopularity because they think it will work in the long-term,” said Tony Travers, a politics professor at the London School of Economics.
He noted that, unlike some of her Conservative Party predecessors, including Johnson and Theresa May, Truss’s free market views were quite straightforward. Her government wants to “move Britain to be a lower tax, more flexible economy which competes head to head with highly paid workers and talent with the E.U. and globally.”
“Whether it works or not, only time will tell,” he said, adding, “whether it survives the short-term, time will tell sooner.”