LONDON-The Bank of England it will suspend the planned start of its gilt sale next week and start temporarily buying long-term bonds to quell the market chaos unleashed by the new government’s so-called “mini-budget.”
UK gilt yields were on track for their steepest monthly rise since at least 1957 as investors fled UK bond markets following new fiscal policy announcements. The measures included large unfunded tax cut swaths that have attracted worldwide criticism, including the IMF.
In a statement on Wednesday, the central bank said it was monitoring the “significant appreciation” of UK and global assets in recent days, which has particularly affected long-term UK government debt.
“If the dysfunction in this market were to continue or worsen, there would be a material risk to the financial stability of the UK. This would lead to an unjustified tightening of financial conditions and a reduction in the flow of credit to the real economy,” said the Bank of England. said.
“In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risk of contagion to credit conditions for UK households and businesses.”
From Wednesday, the Bank will begin temporary purchases of long-term UK government bonds to “restore orderly market conditions”, saying they will be carried out “on whatever scale is necessary” to calm markets.
The Bank’s Financial Policy Committee recognized on Wednesday that the dysfunction in the gilt market represented a significant risk to the country’s financial stability and chose to take immediate action.
The Monetary Policy Committee’s target of an £80 billion ($85 billion) annual reduction of its gilt holdings remains unchanged, the Bank said, with the first gilt sales, initially scheduled for Monday, now to take place. out on October 1. 31
A UK Treasury spokesman confirmed the deal 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 in support of its financial stability and inflation objectives,” the spokesperson added.
The Bank said it will publish a market notice outlining the operational details of the program “shortly.”
returns on 30 year old british gilts Y 10 year old rookies fell more than 30 basis points after the announcement.
‘Caught in a crossfire’
Antoine Bouvet, senior rate strategist at ING, said the Bank of England may need to extend bond purchases beyond the initial two-week period if volatility in the gilt market continues, and that a further increase in interest rates was not ruled out.
Bouvet told CNBC immediately after the announcement that the Bank’s first priority for now had to be the functioning of the gilt market, suggesting that the worst outcome would be for the sovereign to be left without access to the market and unable to secure funding.
“Clearly the gold market got caught in a crossfire between the Bank of England and the Treasury, and it’s not exactly like that, but it seemed like they were competing or working at cross purposes,” Bouvet said.
“So you have a world where you have a recession and the BOE is trying to cool down the economy by hiking, and on the other hand you have the Treasury that is trying to protect the economy from that recession and implementing fiscal measures that are inflationary. “
He added that the Treasury’s statement of support was important, noting that the government would be keen to avoid the impression that the gold market is in “so much trouble” that it had forced the Bank of England to bail out the economy.
