A week ago, the Bank of England took a stab in the dark. It raised interest rates by a relatively modest half a percentage point to tackle inflation. It couldn't know the scale of the storm that was about to break.
Less than 24 hours later, the government of new UK Prime Minister Liz Truss unveiled its plan for the biggest tax cuts in 50 years, going all out for economic growth but blowing a huge hole in the nation's finances and its credibility with investors.
The pound crashed to a record low against the US dollar on Monday after UK finance minister Kwasi Kwarteng doubled-down on his bet by hinting at more tax cuts to come without explaining how to pay for them. Bond prices collapsed, sending borrowing costs soaring, sparking mayhem in the mortgage market and pushing pension funds to the brink of insolvency.
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Financial markets were already in a febrile state because of the rising risk of a global recession and the gyrations caused by three outsized rate increases from a US central bank on the warpath against inflation. Into that "pressure cooker" stumbled the new UK government.
"You need to have strong, credible policies, and any policy missteps are punished," said Chris Turner, global head of markets at ING.
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After verbal assurances by the UK Treasury and Bank of England failed to calm the panic — and the International Monetary Fund delivered a rare rebuke — the UK central bank pulled out its bazooka, saying Wednesday it would print £65 billion ($100 billion) to buy government bonds between now and October 14 — essentially protecting the economy from the fallout of the Truss' growth plan.
"While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position," said Paul Dales, chief UK economist at Capital Economics, commenting on the bank's intervention.
The emergency first aid stopped the bleeding. Bond prices recovered sharply and the pound steadied Wednesday against the dollar. But the wound hasn't healed.
The pound tumbled one per cent, falling back below $US1.08 early Thursday. UK government bonds were under pressure again, with the yield on 10-year debt climbing to 4.16 per cent. UK stocks fell two per cent.
"It wouldn't be a huge surprise if another problem in the financial markets popped up before long," Dales added.
The next few weeks will be critical. Mohamed El-Erian, who once helped run the world's biggest bond fund and now advises Allianz, said that the central bank had bought some time but would need to act again quickly to restore stability.
"The Band-Aid may stop the bleeding, but the infection and the bleeding will get worse if they do not do more," he told CNN's Julia Chatterley.
The Bank of England should announce an emergency rate hike of a full percentage point before its next scheduled meeting on November 3. The UK government should also postpone its tax cuts, El-Erian said.
"It is doable, the window is there, but if they wait too long, that window is going to close," he added.
The UK government has previewed rolling announcements in the coming weeks about how it plans to change immigration policy and make it easier to build big infrastructure and energy projects to boost growth, culminating in a budget on November 23 at which it has promised to publish a detailed plan for reducing debt over the medium term.
'Right plan' or 'reckless gamble'
But it shows no sign of backing away from the fundamental policy choice of borrowing heavily to fund tax cuts that will mainly benefit the rich at a time of high inflation. And the UK Treasury says it won't bring forward the November announcement.
Truss, speaking publicly for the first time since the crisis erupted, blamed global market turmoil and the energy price shock from Russia's invasion of Ukraine for this week's chaos.
"This is the right plan that we've set out," she told local radio on Thursday.
In a series of radio interviews, Truss said her government's decision to cap energy bills for households and businesses would help tame inflation and help millions of people facing a cost-of-living crisis.
Truss told BBC that she had to "take urgent action to get our economy growing, get Britain moving and also deal with inflation."
"Of course, lots of measures we have announced won't happen overnight. We won't see growth come through overnight," she said. "What is important is that we are putting this country on a better trajectory for the long term."
One big problem identified by investors, former central bankers and many leading economists is that her government only set out half a plan at best. It went ahead without an independent assessment from the country's budget watchdog of the assumptions underlying the £45 billion ($69 billion) annual tax cuts, and their longer term impact on the economy. It fired the top Treasury civil servant earlier this month.
Charlie Bean, former deputy governor at the Bank of England, told CNN Business that the government was guilty of "really stupid" decisions. His former boss at the bank, Mark Carney, accused the government of "undercutting" UK economic institutions, saying that had contributed to the "big knock" suffered by the country's financial system this week.
"This is an economic crisis. It is a crisis... that can be addressed by policymakers if they choose to address it," he told the BBC.
British newspapers have started to speculate that Truss will have to fire Kwarteng, her close friend and political soulmate, if she wants to regain the political initiative and prevent her government's dire poll ratings from plunging even further.
"Every single problem we have now is self-inflicted. We look like reckless gamblers who only care about the people who can afford to lose the gamble," one former Conservative minister told CNN.
But for now she's trying to tough it out, and cling onto the Reaganite experiment.
"Raising, postponing, or abandoning tax cuts will be avoided by Truss at all costs as such a reversal would be humiliating and could leave her looking like a lame duck prime minister," wrote Mujtaba Rahman and Jens Larson at political risk consultancy Eurasia Group.
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