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Bank of England postpones bond sales, launches temporary buying programme

ING: BOE may have to expand bond purchases with ongoing market volatility

LONDON – The Bank of England will suspend the planned start of its gilt sale next week and begin temporarily buying long-dated bonds to calm market chaos triggered by the new government’s so-called “mini-budget.”

UK gilt yields were on course for their sharpest monthly rise since at least 1957 as investors fled UK fixed income markets following the new fiscal policy announcements. The measures included large parts of unfunded tax cuts that have attracted global criticism, 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-standing UK sovereign debt particularly hard.

“If the dysfunction in this market were to continue or worsen, there would be a significant risk to the UK’s financial stability. This would lead to an unwarranted tightening of funding conditions and a reduction in the flow of credit to the real economy,” Bank of England. so.

“In line with the objective of financial stability, the Bank of England is ready to restore market functioning and reduce the risk of contagion to credit conditions for UK households and businesses.”

Starting Wednesday, the bank will begin temporary purchases of long-dated British government bonds to “restore orderly market conditions,” saying these will be carried out “on the scale necessary” to calm markets.

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The bank’s fiscal policy committee acknowledged on Wednesday that the dysfunction in the gilt market posed a significant risk to the country’s financial stability, and chose to take measures immediately.

The Monetary Policy Committee’s target of an 80 billion pound ($85 billion) annual reduction of its gilt holdings remains unchanged, the bank said, with the first sale of gilt – originally scheduled for Monday – now taking place on October 31.

A UK Treasury spokesperson confirmed the operation had been “fully indemnified” by the Chancellor of the Exchequer and said Chancellor Kwasi Kwarteng is “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 spokesperson added.

The bank said it will publish a market announcement detailing the operational details of the program “shortly.”

Yields on UK 30-year gilts and 10-year gilts fell by more than 30 basis points after the announcement.

“Caught in the Crossfire”

Antoine Bouvet, senior fixed income strategist at ING, said the Bank of England may need to extend its bond purchases beyond the first two-week period if volatility in the gilt market continues and that a further rate hike was not off the table.

Bouvet told CNBC immediately after the announcement that the bank’s first priority for the time being had to be the functioning of the gilt market, suggesting that the worst outcome would be for the sovereign to be left without market access and unable to secure funding.

“Obviously the gilt market was caught in a crossfire between the Bank of England and the Treasury, and that’s not exactly the case, but it looked a lot 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 the economy with hikes, and on the other hand you have the Treasury trying to shield the economy from that recession and implementing fiscal measures that are pro-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 gilts market is in “so much trouble” that it had forced the Bank of England to step in to save the economy.

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