The speed of the rise in bond yields had also disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.
“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in” currency and bond markets, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a research note. “But its actions to date have eroded confidence among global investors, which cannot be easily restored. Accordingly, a painful recession driven by surging borrowing costs lies ahead.”
The market turmoil and the central bank’s intervention reveal the extent to which the government’s plans are at odds with the bank’s monetary policy goals. The government is trying to quickly generate economic demand, while the bank is trying to cool it to lower inflation. Consumer prices rose nearly 10 percent in August from a year earlier, putting the inflation rate at levels unseen since 1982.
On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November. Markets are betting that interest rates will rise above 5 percent early next year, from 2.25 percent.
Just last Thursday, the central bank said it would initiate its plan to sell bonds back to the market — a process called quantitative tightening — as it tried to end the long era of easy money in its fight against inflation. It had insisted there would be a “high bar” for the bank to deviate from the plan, which would over the next year reduce its holdings of bonds by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was postponing the start of sales until the end of October.
Even as the bank tried to differentiate between Wednesday’s effort to ensure financial stability and the bank’s monetary policy stance, the intervention risks worsening the confusion in markets about the central bank’s goals, Mr. McGuire said.
Among the questions, he said, are: “Are we trying to contain inflation? Are we pushing back against a fiscally expansive government? Are we undertaking quantitative tightening?” Or, alternatively: “Are we doing the opposite? Are we adding to the inflationary pressure? Are we simply going to keep buying more bonds?”
The lack of clarity, he said, “doesn’t seem to be a positive in terms of the outlook for U.K. assets.”