The central bank said it was monitoring the “significant revaluation” of UK and global assets in recent days.
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LONDON — The Bank of England will suspend the planned start of its gilt sales next week and start buying long-term bonds temporarily to calm the market chaos sparked by the new government’s so-called “mini-budget”. .
Yields on UK gilts were on course for their biggest monthly rise since at least 1957 as investors fled UK bond markets following new fiscal policy announcements. The measures included large swaths of unfunded tax cuts that drew global criticism, including from the IMF.
In a statement on Wednesday, the central bank said it was monitoring the “significant revaluation” of UK and global assets in recent days, which has hit UK long-term government debt particularly hard.
“If the dysfunction of this market were to continue or worsen, there would be a significant risk to the financial stability of the United Kingdom. This would lead to an undue tightening of funding conditions and a reduction in the flow of credit to the UK. real economy,” the Bank of England said. said.
“In line with its objective of financial stability, 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’, and said these will be made ‘on the scale necessary’ to appease the steps.
The Bank’s Financial Policy Committee recognized on Wednesday that the dysfunctional gilt market posed a significant risk to the country’s financial stability and opted to take immediate action.
The Monetary Policy Committee’s target of an annual reduction of £80 billion ($85 billion) in its holdings of gilts remains unchanged, the Bank said, with the first sales of gilts – originally scheduled for Monday – having now takes place on October 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 to support its financial stability and inflation objectives,” the spokesperson added.
The Bank has announced that it will “shortly” publish a contract notice outlining the operational details of the program.
UK 30-year and 10-year 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 have to extend bond purchases beyond the initial two-week period if volatility in the gilt market continues, and a further hike in interest rates was 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, suggesting that the worst outcome would be for the sovereign to be left without market access and unable to obtain a funding.
“Clearly the gilt market has been caught in the crossfire between the Bank of England and the Treasury, and it’s not exactly like that, but it looked a lot like they were competing or working for ends crossed,” Bouvet said.
“So you have a world where you have a recession and the BOE tries to cool the economy with hikes, and on the other hand you have the Treasury trying to protect the economy from that recession and implement inflationary fiscal measures.”
He added that the statement of support from the Treasury was important, noting that the government would be keen to avoid the impression that the gilt market is “so in trouble” that it has forced the Bank of England to deal saving the economy.