The Bank of England has taken emergency action to calm turmoil in financial markets amid the collapse in the pound and increase in government borrowing costs triggered by Kwasi Kwarteng’s mini budget.
Threadneedle Street said it was taking urgent steps to buy long-dated UK government bonds, beginning immediately in an attempt to stabilise the market.
Taking evasive action less than a week after the chancellor announced £45bn in unfunded tax cuts, the Bank said it would undertake temporary and targeted purchases in the gilt market on financial stability grounds.
“The Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses,” it said.
The Bank said it would purchase bonds on “whatever scale is necessary” to calm markets, after the collapse in sterling to the lowest level in history on Monday and a dramatic rise in the UK’s borrowing costs to the highest level since the 2008 financial crisis.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” it added.
Yields on 10-year UK government debt – which fall when bond prices rise – fell back after the announcement, from 4.5% to just below 4.2%, in a sign the steps were soothing global market jitters.
The pound fell by more than a cent against the dollar, dropping below $1.06.
To take action the central bank said it would purchase long-dated government debt until 14 October, before then selling the bonds back to investors once it believes smooth functioning has returned to the markets.
The Bank said it would delay plans to start selling £80bn of government bonds built up under its quantitative easing programme from as early as next week, although said it remained committed to proceeding from 31 October.
The intervention by the Bank comes hours after the International Monetary Fund issued a stinging rebuke for the chancellor’s tax cutting mini-budget, saying the UK urgently needed to rethink its plans to avoid stoking inequality.
Some investors are betting the Bank could be forced to launch an emergency rise in interest rates to shore up confidence in the UK economy after the plunge in the pound over recent days. After the fallout from Kwarteng’s mini-budget, Threadneedle Street is expected to raise rates closer to 6% by the middle of next year, in a move analysts have warned could crash the UK’s housing market.
Political tensions are escalating between the central bank and the Treasury, after Liz Truss threatened during the Conservative leadership campaign to review the Bank’s remit.
The Treasury said in response to the Bank’s intervention that Kwarteng was “committed” to its independence and that the Treasury was working closely with Threadneedle Street to support its financial stability and inflation objectives.
“Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today (28 September) in order to restore orderly market conditions,” the Treasury said.
“These purchases will be strictly time limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury.”
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