The pound and European equities fell Thursday after the previous day’s bank of England-fuelled rally, with investors growing increasingly worried about the UK economy as Prime Minister Liz Truss backed the controversial mini-budget that sparked turmoil across global markets.
The central bank sparked a surge across risk assets Wednesday following the announcement of a two-week programme to spend £65 billion ($71 billion) buying long-dated UK bonds to restore orderly market conditions.
The move came after new finance minister Kwasi Kwarteng unveiled a tax-cutting mini-budget Friday that many experts, including the International Monetary Fund, warned would fan borrowing and deal a further blow to the already fragile economy.
Kwarteng’s plan sent yields on UK government bonds, as well as those of other countries, soaring and raised the prospect of even bigger interest rate hikes.
The BoE move provided a massive shot in the arm for investors, pushing yields down, and sterling and stock markets up. Analysts said the decision provided some hope that central banks were ready to step in with support if things got too bad.
However, the impact was short lived as traders continue to worry about the long-term effect on the UK economy from the budget.
The Bank moved to stop contagion, but stress remains and it remains the case that it must tighten policy faster to offset the effects of the budget, said Markets.com analyst Neil Wilson.
The new round of easing also knocked the BoE’s plan to fight inflation off course as it had to suspend a programme to sell gilts, which had helped lift borrowing costs.