LONDON – The Bank of England is set to suspend the scheduled start of its gilt sales next week and begin buying long-dated bonds on a temporary basis in a bid to calm market chaos sparked by the new government’s so-called mini-budget.
UK government bond yields, known as ‘gilts’, were on track for their strongest monthly rise since at least 1957, as investors fled UK bond markets following fresh fiscal policy announcements. Measures included large amounts of unfunded tax cuts that have drawn criticism from around the world, including from the IMF.
In a statement on Wednesday, the central bank said it was monitoring the “significant repricing” of UK and global assets in recent days, which has hit long-term UK government debt particularly hard.
“Should dysfunction in this market persist or worsen, there would be a significant risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction in the flow of credit to the real economy,” the Bank of England said.
“In line with its objective of financial stability, the Bank of England stands ready to restore the functioning of the market and reduce any risks of contagion to credit conditions for UK households and businesses.”
From Wednesday, the bank will begin temporary purchases of long-dated UK government bonds to “restore orderly market conditions” and said these will be done “to the extent necessary” to calm markets.
The bank’s Financial Policy Committee on Wednesday acknowledged that the dysfunction in the gilt market poses a significant risk to the country’s financial stability and decided to take immediate action.
The Monetary Policy Committee’s target of reducing its gilt holdings by £80bn ($85bn) annually remains unchanged, the bank said, with the first gilt sales – originally scheduled for Monday – now taking place on October 31 .
A spokesman for the UK Treasury confirmed that the operation had been “fully compensated” by the Treasury and said Finance Minister Kwasi Kwarteng was “committed to the independence of the Bank of England”.
“The government will continue to work closely with the bank to support its financial stability and inflation targets,” the spokesman added.
The bank said it would issue a market statement “soon” outlining the operational details of the programme.
30-year and 10-year UK gilt yields fell more than 30 basis points after the announcement.
“Caught in the Crossfire”
Antoine Bouvet, senior rates strategist at ING, said the Bank of England may need to extend asset purchases beyond the initial two-week period if volatility in the gilt market persists and that another rate hike is not off the table.
Bouvet told CNBC immediately after the announcement that the bank’s first priority for now must be the functioning of the gilt market, implying that the worst outcome would be the state being left without market access and unable to secure funding.
“The gilt market was clearly caught in a crossfire between the Bank of England and the Treasury, and it’s not exactly like that, but it looked very much like they were competing or working on opposite ends,” Bouvet said.
“So you have a world where you have a recession and the BOE is trying to cool the economy with rate hikes and on the other side you have the Treasury trying to protect the economy from this recession and implementing fiscal measures that are inflationary. “
He added that the Treasury Department’s statement of support was important, noting that the government wanted to avoid any impression that the gilt market was in “so much trouble” that it had forced the Bank of England to postpone the economy’s bailout to take hand.