Bank of England steps in to buy UK bonds, warns of risks to financial stability

London
CNN Business
—

The Bank of England said on Wednesday it would buy UK government debt “on whatever scale may be necessary” in an emergency intervention to stem a bond market crash that it warned could threaten financial stability.

Investors have dumped the pound and British bonds since the government of new Prime Minister Liz Truss on Friday unveiled a huge package of tax cuts and increased borrowing aimed at boosting the economy and protecting households and businesses from skyrocketing energy bills this winter.

Markets fear the plan will drive up inflation, forcing the Bank of England to push interest rates as high as 6% next spring, from 2.25% today. Mortgage markets have been in turmoil all week as lenders have struggled to price their loans. Hundreds of products have been recalled.

“This repricing [of UK assets] has become more significant over the past 24 hours – and that is particularly affecting long-dated UK government debt,” the central bank said in its statement.

“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.”

In other words, the Bank of England is worried that the markets may take hold and that the economy – which it believes has already entered a recession – will suffer even worse damage.

To prevent that from happening, the central bank said it would buy long-dated British government bonds until October 14.

“The purchases will be made on the scale necessary to achieve this result,” it added.

It reiterated that it would fully assess the latest developments at its next scheduled meeting in November and act accordingly.

“The [bank] will not hesitate to change interest rates as much as necessary to bring inflation back to the 2% target sustainably over the medium term, in line with its mandate, it said.

Yields on 10-year UK government bonds fell sharply after the Bank of England’s announcement on Wednesday, but remain high. They were last close to 4.1%, up from below 2.9% at the start of the month. However, the pound continued its slide, falling 0.4% to below $1.07.

Interest rates in the UK have risen seven times since December 2021. As part of efforts to tighten monetary policy and get a grip on inflation, which is now close to 10%, the bank plans to sell £80bn worth of British government bonds each year. The bonds were bought as part of an attempt to support the economy during the pandemic.

It said on Wednesday it would keep that target, but that the start of sales had been pushed back to October 31.