US Business

The Bank of England stepped in Wednesday to shore up market confidence after the International Monetary Fund criticised Britain’s inflation-fighting budget.

In a surprise move, the BoE announced it was temporarily buying up long-dated UK government bonds “to restore orderly market conditions”.

The pound promptly slumped 1.7 percent to $1.0552 before clawing back ground.

There was respite elsewhere, with the UK government’s 30-year bond yield retreating to 4.44 percent, having hit a 1998 peak at 5.14 percent.

The BoE intervention followed criticism Tuesday from the IMF, which argued that Britain’s budget could increase inequality and worsen inflation.

Credit ratings agency Moody’s also waded in overnight with a warning about soaring debt.

– ‘Finally intervenes’ –

“So, the Bank of England finally intervenes after coming under so much pressure to act,” said City Index analyst Fawad Razaqzada.

“The BoE’s intervention is an attempt to soothe investor nerves after they were spooked by last week’s mini-budget.”

Finance minister Kwasi Kwarteng’s big tax cuts and energy price freeze, aimed at boosting the UK’s recession-threatened economy, appeared to have had the opposite effect as traders warn of ballooning debt to pay for the incentives.

Following last Friday’s budget, UK bond yields soared and the pound hit a record low at $1.0350, perilously close to parity.

Critics added that Kwarteng’s measures would benefit the rich more than the poorest, as millions of Britons suffer from a cost-of-living crisis.

“We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise,” the Treasury said after the IMF criticism.

“We are focused on growing the economy to raise living standards for everyone,” it added, blaming sky-high oil, gas and electricity prices on Russia’s invasion of Ukraine.

– IMF advice –

In a highly unusual intervention, the IMF late Tuesday said it was “closely monitoring” developments and urged the government in London led by new Prime Minister Liz Truss to change tack.

The Fund added: “We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

“However, given elevated inflation pressures in many countries… we do not recommend large and untargeted fiscal packages at this juncture.”

The IMF said the “UK measures will likely increase inequality” and stressed the importance of fiscal policy not working “at cross purposes to monetary policy”.

Analysts warned that Britain’s controversial measures could force the BoE to hike interest rates far higher than forecast.

“Expectations that there will be a super-size interest rate hike coming from the Bank of England to try and counter the government splurge on tax cuts and spending have increased,” Hargreaves Lansdown analyst Susannah Streeter noted Wednesday.

Many central banks, including the BoE, are aggressively hiking interest rates in a bid to cool decades-high inflation. 

The BoE on Wednesday warned there was a “material risk to UK financial stability” should current market conditions continue.

Purchases “will be carried out on whatever scale is necessary”, added the bank headed by governor Andrew Bailey.

– Tax cuts –

In his budget, Chancellor of the Exchequer Kwarteng cut the highest rate of income tax and scrapped a cap on banker bonuses.

He also, however, announced a plan to lower income tax for all workers.

Conservative party head Truss appointed Kwarteng to replace Rishi Sunak, who reached the final two in the race to be prime minister.

Sunak had hit out strongly at Truss’s promise of tax cuts, arguing that the UK priority was to first bring down the nation’s inflation rate that stands at a near 40-year high of 9.9 percent. 

Moody’s called Britain’s new fiscal policy regime “credit negative”, adding that a sustained confidence shock could “permanently” weaken its debt affordability.

Kwarteng has said he would wait until November 23 to outline plans on controlling government debt.

Global stock markets sank Wednesday and the dollar soared as investors fretted over recession fears and heightened Ukraine tensions.

“With the prospect of a sharp economic slowdown, further pain for households and businesses, and investor sentiment on its knees, alas equities markets continue their descent,” said AJ Bell investment director Russ Mould.

The haven dollar held at multi-year highs against rival currencies, with the euro plumbing a new 20-year low at $0.9536.

The British pound slumped 1.7 percent against the greenback — despite the Bank of England snapping up UK government bonds to try and bring calm to markets.

However, the UK government’s 30-year bond yield managed to retreat to 4.44 percent, having hit a 1998 peak at 5.14 percent.

The BoE intervention followed criticism Tuesday from the International Monetary Fund, which argued that Britain’s recent budget could increase inequality and worsen inflation.

New finance minister Kwasi Kwarteng’s tax-cutting plan last week sent shockwaves through markets, pushing the pound to a record low and leading to dire warnings for Britain’s economy.

The dollar remains the go-to unit as the US Federal Reserve leads the way in raising interest rates.

Observers are betting that US borrowing costs will peak at around 4.75 percent next year, and are expected to remain elevated for some time.

The prospect of such tight monetary policy has battered equities, as US 10-year Treasury yields — a gauge of future rates — hit four percent for the first time since 2010.

Sentiment was also rattled by worries about developments in Ukraine, after Kremlin-installed authorities in four regions under Russian control claimed victory in annexation votes, with Moscow warning it could use nuclear weapons to defend the territories.

Ukraine and its allies have denounced the so-called referendums as a sham, saying the West would never recognise the results.

– Key figures at around 1145 GMT –

London – FTSE 100: DOWN 0.8 percent at 6,927.75 points

Frankfurt – DAX: DOWN 1.5 percent at 11,961.92

Paris – CAC 40: DOWN 1.4 percent at 5,675.32

EURO STOXX 50: DOWN 1.5 percent at 3,279.53

Tokyo – Nikkei 225: DOWN 1.5 percent at 26,173.98 (close)

Hong Kong – Hang Seng Index: DOWN 3.4 percent at 17,250.88 (close)

Shanghai – Composite: DOWN 1.6 percent at 3,045.07 (close)

New York – Dow: DOWN 0.4 percent at 29,134.99 (close)

Pound/dollar: DOWN at $1.0569 from $1.0730 on Tuesday

Euro/dollar: DOWN at $0.9556 from $0.9595

Euro/pound: UP at 90.41 pence from 89.39 pence 

Dollar/yen: DOWN at 144.76 yen from 144.81 yen

Brent North Sea crude: UP 0.1 percent at $86.36 per barrel

West Texas Intermediate: UP 0.5 percent at $78.86 per barrel

burs-rfj/bcp/rox

The Bank of England stepped in Wednesday to shore up market confidence after the International Monetary Fund criticised Britain’s inflation-fighting budget.

Reacting to markets turmoil, the BoE announced it was temporarily buying up long-dated UK government bonds “to restore orderly market conditions”.

However, the pound promptly slumped 1.7 percent to $1.0552.

The BoE intervention followed criticism Tuesday from the IMF, which argued that Britain’s budget could increase inequality and worsen inflation.

Credit ratings agency Moody’s also waded in overnight with a warning about soaring debt.

Finance minister Kwasi Kwarteng’s big tax cuts and energy price freeze, aimed at boosting the UK’s recession-threatened economy, appeared to have had the opposite effect as traders warn of ballooning debt to pay for the incentives.

Following last Friday’s budget, UK government bond yields have soared and the pound hit a record low at $1.0350.

Critics added that Kwarteng’s measures would benefit the rich more than the poorest, as millions of Britons suffer from a cost-of-living crisis.

“We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise,” the Treasury said as it sought to defend itself.

“We are focused on growing the economy to raise living standards for everyone,” it added, blaming sky-high oil, gas and electricity prices on Russia’s invasion of Ukraine.

– IMF advice –

In a highly unusual intervention, the IMF late Tuesday said it was “closely monitoring” developments and urged the government in London led by new Prime Minister Liz Truss to change tack.

The Fund added: “We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

“However, given elevated inflation pressures in many countries… we do not recommend large and untargeted fiscal packages at this juncture.”

The IMF said the “UK measures will likely increase inequality” and stressed the importance of fiscal policy not working “at cross purposes to monetary policy”.

Analysts warned that Britain’s controversial measures could force the Bank of England to hike interest rates far higher than forecast.

“Expectations that there will be a super-size interest rate hike coming from the Bank of England to try and counter the government splurge on tax cuts and spending have increased,” Hargreaves Lansdown analyst Susannah Streeter noted Wednesday.

Many central banks, including the BoE, are aggressively hiking interest rates in a bid to cool decades-high inflation. 

– Tax cuts –

In his budget, Chancellor of the Exchequer Kwarteng cut the highest rate of income tax and scrapped a cap of banker bonuses.

He also, however, announced a plan to lower income tax for all workers.

Conservative party head Truss appointed Kwarteng to replace Rishi Sunak, who reached the final two in the race to be prime minister.

Sunak had hit out strongly at Truss’s promise of tax cuts, arguing that the UK priority was to first bring down the nation’s inflation rate that stands at a near 40-year high of 9.9 percent. 

Moody’s called Britain’s new fiscal policy regime “credit negative”, adding that a sustained confidence shock could “permanently” weaken its debt affordability.

Kwarteng has said he would wait until November 23 to outline plans on controlling government debt.

Turkey’s booming wartime trade with Moscow took a giant step back on Wednesday with confirmation that the last three banks still processing Russian card payments were pulling out under pressure from Washington.

The decision follows weeks of increasingly blunt warnings from the United States for NATO member Turkey to either limit its economic relations with Russia or face the threat of sanctions itself.

The US Treasury said last week that Turkish banks working with Russian Mir bank cards “risk supporting Russia’s efforts to evade US sanctions”.

Two private Turkish lenders that began processing Mir after Turkish President Recep Tayyip Erdogan met Russian counterpart Vladimir Putin in August suspended the transactions earlier this month.

But three state lenders — Halkbank, Vakifbank and Ziraatbank — still worked with the cards.

A senior Turkish official did not say when Russians would no longer be able to access their cards in Turkey at all.

The three banks “are still processing (the outstanding) payments, but they have set a future date” for pulling out, the official said on condition of anonymity because no formal decision by the three bank has been announced.

The Kremlin on Wednesday condemned Washington for forcing Turkish banks to cut their Russian ties.

“They are threatened with secondary sanctions on the banking system. And this decision, of course, was made under this unprecedented pressure,” Kremlin spokesman Dmitry Peskov said.

– Shift in tone –

The explosion of Turkish trade with Russia during the seven-month war in Ukraine has been a source of growing irritation for Washington.

The value of trade between the two rose by more than 50 percent. Turkey has also agreed to pay for a quarter of its Russian natural gas imports in rubles.

US Deputy Secretary of the Treasury Wally Adeyemo paid a rare visit to Ankara and Istanbul in June to express Washington’s worries that Russian oligarchs and big businesses were using Turkish entities to evade Western sanctions.

The Treasury sent a follow up letter to Turkish banks and businesses in August warning that they cannot expect to have “access to the US dollar and other major currencies” if they trade with sanctioned Russians.

Turkey has tried to stay neutral in the Ukrainian conflict and refused to sign up to Western sanctions against Russia.

It has used this status to strike a range of economic agreements that have helped prop up the ailing economy in the run-up to June elections in which Erdogan will struggle to extend his two-decade grip on power.

Mir cards offer millions of Russians that vacation in Turkey each year a way to access their rubles and pay for everything from restaurants to hotels.

They are also increasingly important to Russians who are fleeing to Turkey as part of a new migration wave of men trying to avoid the draft.

– ‘Fear of secondary sanctions’ –

Prominent Russian sanctions campaigner Bill Browder — a businessman who left Moscow after one of his associates died in jail — said the Turkish bank decision showed that the “fear of secondary sanctions is starting to work”.

“Turkish banks have abandoned Putin’s Mir payment system out of fear of being punished by the US,” Browder tweeted.

“We need to roll this out far and wide. Chinese, Indian UAE and many other countries should understand there will be consequences.”

Russia developed Mir in 2015 to circumvent Western sanctions imposed following its annexation of Ukraine’s Crimea peninsula.

But Russian central bank chief Elvira Nabiullina conceded earlier this month that Moscow was encountering “difficulties” expanding its payment system around the world.

Uzbekistan suspended Mir transactions last Friday citing unspecified “technical procedures”.

The card still works in Belarus and a handful of Russia’s closest allies.

Visa and Mastercard no longer issue new cards in Russia or process foreign payments on the cards acquired before the war.

The EU said Wednesday that leaks from two Russia-Germany undersea gas pipelines appeared to be “a deliberate act”, as fossil fuel-rich Norway boosted security at its installations.

The three outflows from the Nord Stream 1 and 2 pipelines have sent natural gas prices soaring, exacerbating an energy crunch in Europe as it stands on the threshold to winter.

Methane gas from the leaks are bubbling to the surface of the Baltic Sea close to Denmark and Sweden in discharges expected to last for a week, until depletion of the gas in the pipelines.

Europe suspects the leaks to be from sabotage. 

They “are not a coincidence,” EU foreign policy chief Josep Borrell said in a statement. “All available information indicates those leaks are the result of a deliberate act.”

He warned: “Any deliberate disruption of European energy infrastructure is utterly unacceptable and will be met with a robust and united response.”

Suspicion has focused on Russia, which has cut gas supplies to Europe in retaliation for severe Western sanctions over the war in Ukraine.

But the Kremlin hit back, saying it was “stupid and absurd” to accuse Russia of causing the leaks.

EU chiefs Ursula von der Leyen and Charles Michel have both blamed the Nord Stream leaks on sabotage.

Michel on Wednesday tweeted that they “appear to be an attempt to further destabilise energy supply to EU”.

He added: “Those responsible will be held fully accountable and made to pay.”

The EU is currently mulling further sanctions on Russia for annexation votes imposed on four regions in Ukraine its forces occupy.

– Weeks before inspection –

Neither of the Nord Stream pipelines are currently operational, but they were full with gas when they were hit with what Swedish seismologists said were “massive releases of energy”.

One of the seismologists told AFP “there isn’t much else than a blast that could cause it”.

Danish Defence Minister Morten Bodskov told reporters in Brussels that “it can easily take one or two weeks for the area to calm down enough” for an inspection to verify the cause.

Two Danish military vessels have been sent to the area.

Non-EU member Norway, which has now overtaken Russia as the biggest supplier of gas to Europe, said it will beef up security around its oil and gas facilities.

“The government has decided to put measures in place to increase security at infrastructure sites, land terminals and platforms on the Norwegian continental shelf,” Norwegian Energy Minister Terje Aasland said.

The Norwegian Petroleum Safety Authority earlier this week called for “increased vigilance from all operators and shipping companies on the continental shelf”.

Built in parallel to the Nord Stream 1 pipeline, Nord Stream 2 was intended to double the capacity for Russian gas imports to Germany.

But Berlin blocked newly completed Nord Stream 2 in the days before the war.

Germany, which has been highly dependent on imports of fossil fuels from Russia to meet its energy needs, has since come under acute stress as Moscow’s supplies dwindle.

Sweden and Poland agree sabotage is the most likely cause of the Nord Stream leaks, with Warsaw suggesting Russia was probably the culprit, to escalate the war in Ukraine.

The United States said it was looking into the leaks, with Secretary of State Antony Blinken telling reporters that, if sabotage were confirmed, “that’s clearly in no one’s interest”.

The US has pledged to help European allies on energy security, and is already shipping what liquified natural gas it has to spare to the EU.

Turkey’s booming wartime trade with Moscow took a giant step back on Wednesday with confirmation that the last three banks still processing Russian card payments were pulling out under pressure from Washington.

The decision follows weeks of increasingly blunt warnings from the United States for NATO member Turkey to either limit its economic relations with Russia or face the threat of sanctions itself.

The US Treasury said last week that Turkish banks working with Russian Mir bank cards “risk supporting Russia’s efforts to evade US sanctions”.

Two private Turkish lenders that began processing Mir after Turkish President Recep Tayyip Erdogan met Russian counterpart Vladimir Putin in August suspended the transactions earlier this month.

But three state lenders — Halkbank, Vakifbank and Ziraatbank — still worked with the cards.

A senior Turkish official did not say when Russians would no longer be able to access their cards in Turkey at all.

The three banks “are still processing (the outstanding) payments, but they have set a future date” for pulling out, the official said on condition of anonymity because no formal decision by the three bank has been announced.

The decision follows a meeting headed by Erdogan last Friday that officially focused on looking at “alternatives” to the Russian cards.

– Shift in tone –

The explosion of Turkish trade with Russia during the seven-month war in Ukraine has been a source of growing irritation for Washington.

The value of trade between the two rose by more than 50 percent. Turkey has also agreed to pay for a quarter of its Russian natural gas imports in rubles.

US Deputy Secretary of the Treasury Wally Adeyemo paid a rare visit to Ankara and Istanbul in June to express Washington’s worries that Russian oligarchs and big businesses were using Turkish entities to evade Western sanctions.

The Treasury sent a follow up letter to Turkish banks and businesses in August warning that they cannot expect to have “access to the US dollar and other major currencies” if they trade with sanctioned Russians.

Turkey has tried to stay neutral in the Ukrainian conflict and refused to sign up to Western sanctions against Russia.

It has used this status to strike a range of economic agreements that have helped prop up the ailing economy in the run-up to June elections in which Erdogan will struggle to extend his two-decade grip on power.

Mir cards offer millions of Russians that vacation in Turkey each year a way to access their rubles and pay for everything from restaurants to hotels.

They are also increasingly important to Russians who are fleeing to Turkey as part of a new migration wave of men trying to avoid the draft.

But analysts note a shift in Turkey’s tone away from Russia in the past few weeks.

Ankara last week strongly condemned the “illegitimate” polls the Kremlin is using as a pretext to annex four Ukrainian regions now under partial Russian control.

– ‘Fear of secondary sanctions’ –

Prominent Russian sanctions campaigner Bill Browder — a businessman who left Moscow after one of his associates died in jail — said the Turkish bank decision showed that the “fear of secondary sanctions is starting to work”.

“Turkish banks have abandoned Putin’s Mir payment system out of fear of being punished by the US,” Browder tweeted.

“We need to roll this out far and wide. Chinese, Indian UAE and many other countries should understand there will be consequences.”

Russia developed Mir in 2015 to circumvent Western sanctions imposed following its annexation of Ukraine’s Crimea peninsula.

But Russian central bank chief Elvira Nabiullina conceded earlier this month that Moscow was encountering “difficulties” expanding its payment system around the world.

Uzbekistan suspended Mir transactions last Friday citing unspecified “technical procedures”.

The card still works in Belarus and a handful of Russia’s closest allies.

Visa and Mastercard no longer issue new cards in Russia or process foreign payments on the cards acquired before the war.