Explained: Why Britain's Senior Bankers Are Clashing With Politicians

On Wednesday morning in London, the Bank of England (BoE) said it would not extend its bond-buying scheme beyond Friday. The announcement came one day after being forced to intervene for a third time since the end of September to calm investors spooked by the government's mini-budget.

The market has been in a frenzy over the U.K.'s newly appointed government's financial plans since Chancellor of the Exchequer Kwasi Kwarteng announced tax cuts on September 23, which he said would be funded by future debt.

"They announced they were going to have a spending binge, essentially, by cutting taxes at a time when there was already a very substantial budget deficit and a high-debt-to-GDP-ratio," Professor James Foreman-Peck of Cardiff University in the U.K. told Newsweek.

"So the market anticipated there were going to be a lot more bonds issued and this pushed the price of bonds down and the interest rate up on bonds. And this has upset the pension market because they have always relied on government bonds as being reliable financial assets, and they seem no longer reliable."

Immediately after Kwarteng's announcement, the sterling slumped to a record low, as investors worried about inflation surging and the U.K.'s economy going into shambles. The International Monetary Fund (IMF) openly criticized Kwarteng's decision, warning the U.K. government should backtrack on its new measures or face a slowdown in growth from 3.6 percent this year to 0.3 percent in 2023.

The BoE was forced to intervene for the first time on September 28, announcing it will temporarily purchase up to £65 billion ($72.1 billion) in government bonds until October 14 to stabilize their prices.

"The Bank of England has intervened to stabilize the price of these government bonds," said Foreman-Peck. "But ultimately, I think they're going to be hard-pressed to do it, because so long as the government is committed to pumping out more demand for bonds, the markets kind of think they're not worth as much as they were. Interest rates will be higher as a result."

Again on Monday and Tuesday, the bank announced additional emergency measures, writing that "dysfunction in this market, and the prospect of self-reinforcing 'fire sale' dynamics, pose a material risk to UK financial stability."

Senior bankers at the BoE have been quoted by the BBC as directly blaming the government for the chaos in the markets—a rare accusation coming from the country's central bankers. But "these are unusual times," said Foreman-Peck.

"Only in 1997 did the Bank of England become independent again, after it was nationalized and it simply had to do what the government wanted them to do. Now the Bank of England is supposed to maintain its interest rate at 2 percent, which it clearly has failed to do thanks to the recent inflationary spike," Foreman-Peck said.

"The process of disciplining democratic governments in this country has involved, among other things, giving the Bank of England an independent remit over monetary policy, and by introducing the Office of Budget Responsibility, who are responsible for setting forecasts of what's going to happen, given particular budgetary stances and by and large, governments have taken into account what the likely future consequences are going to be of the fiscal policies they pursue.

"But this government has just got the Treasury to say, 'Oh, well, as long as we have 2.5 percent economic growth every year, we'll be all right. We'll have it. That GDP ratio won't rise.' But of course, everybody knows they're not going to have 2.5 percent growth every year and forecasts are near .8 percent. So markets are worried."

On Tuesday, Kwarteng came under the IMF's fire again, when the Washington-based organization said the U.K.'s government's tax cuts and energy support package is making the BoE's fight to slow down surging inflation harder.

"I don't see how [the government] can continue with this course. The real question is how long it takes for that message to sink in," Foreman-Peck said.

What has been made clear by the BoE is that its interventions should not last longer than Friday, as declared by BoE's governor Andrew Bailey on Wednesday morning. After his announcement, the sterling fell by more than a cent to below $1.10.

"The bank has a responsibility to ensure monetary stability, so I'm sure they'll do their best to stop the collapse of bond prices," said Foreman-Peck. "But there's a limit to what they can do as the government is dedicated to pumping up the supply of bonds so energetically instead of reducing it."