Pound Falls After UK Bank Chief Rules Out Extending Help

LONDON (AP) -- The pound sank against the dollar early Wednesday after the Bank of England confirmed it won't extend an emergency debt-buying plan introduced last month to stabilize financial markets.

Bank Governor Andrew Bailey said the program will end on Friday as scheduled.

"My message to the (pension) funds involved – you've got three days left now. You have got to get this done," Bailey said late Tuesday in Washington. "Part of the essence of a financial stability intervention is that it is clearly temporary."

The pound fell by almost 1% to just below $1.10 after Bailey spoke, before rallying slightly after the Financial Times reported that the bank was, after all, prepared to keep buying bonds beyond the Friday deadline.

The bank quashed that report, saying its "temporary and targeted purchases" of government bonds "will end on October 14."

"The governor confirmed this position yesterday and it has been made absolutely clear in contact with the banks at senior levels," the bank said.

The central bank took emergency action after the British government on Sept. 23 announced plans for 45 billion pounds ($50 billion) in tax cuts without saying how it would pay for them. The announcement spooked financial markets and sent the pound plunging to a record low of $1.03 against the dollar.

The Bank of England intervened to prop up the bond market and stop a wider economic crisis that particularly threatened pension funds.

On Tuesday the bank extended its intervention, saying it will now buy inflation-linked securities -- which offer protection from inflation -- as well as conventional government bonds as it seeks to "restore orderly conditions" in the market.

Analysts say pension funds lobbied the central bank to extend the program by two weeks, but Bailey stuck to the timeline in an appearance at the annual meeting of the Institute of International Finance in Washington.

The market turmoil has caused pain for many Britons -- especially prospective homebuyers, who have seen mortgage rates soar on the increased prospect of a big rate hike from the central bank when it meets next month.

It has also put intense political pressure on the Conservative government of Prime Minister Liz Truss, who took office in early September with a promise to boost growth through tax cuts and deregulation.

Friction has grown between the government and the independent Bank of England. Business Secretary Jacob Rees-Mogg suggested Wednesday that market turbulence was primarily the result of the bank's failure to raise interest rates as quickly as its U.S. counterpart, the Federal Reserve.

He said the market response was "much more to do with interest rates than it is to do with a minor part of fiscal policy."

Many economists dispute that view and blame the government's budget announcement for the mayhem. The announcement of 45 billion pounds of tax cuts came on top of a 60 billion-pound plan to cap energy prices to help shield homes and businesses from steep price rises driven by Russia's invasion of Ukraine.

In an effort to ease concerns, Treasury chief Kwasi Kwarteng said Monday that he would release the government's detailed fiscal plans on Oct. 31, three weeks earlier than scheduled.

But the government still hasn't detailed how it will pay for its tax cuts, except to say faster economic growth will increase tax revenue.

Investors are concerned that the government's plans will increase public debt and fuel further inflation, which is already running at a near 40-year high of 9.9%. Economists say deep public spending cuts will be needed. The independent Institute for Fiscal Studies says the government may have to reduce spending by as much as 62 billion pounds a year to achieve its targets for controlling public debt.

In more bad financial news, the Office for National Statistics said Wednesday that Britain's economy contracted by 0.3% in August, down from 0.1% growth in July, with manufacturing and consumer services both recording falls.

"The economy shrank in August with both production and services falling back, and with a small downward revision to July's growth the economy contracted in the last three months as a whole," said the office's chief economist, Grant Fitzner.