By Ben Kerrigan-
The Bank Of England stepped in with another emergency intervention in the markets on Tuesday in an attempt to stave off a “fire sale” of UK government bonds by pension funds.
The Bank’s intervention follows the turmoil of the government’s mini-budget on financial markets which initially plunge the pound beyond levels seen in decades.
The mini-budget – which was announced on 23 September – pledged £45bn of tax cuts as part of a plan to boost economic growth, but the level of government borrowing required shocked investors who questioned the sustainability of the public finances.
In the aftermath of the statement, the pound hit a record low and investors demanded a much higher return for investing in government bonds, causing some to drop sharply in value
With the deadline for the Bank’s bond-buying programme fast approaching, there have been concerns volatility would return once the scheme ends.
In the second update for its bond-buying scheme in as many days, the Bank said it would expand its operations to include purchases of index-linked gilts, a type of UK government bond that tracks inflation.
Threadneedle Street said it was taking the step to further increase its emergency programme, which is due to expire on Friday, after a “significant repricing” for UK government debt this week.
them,” he told BBC Radio 4’s Today programme. “The message may have been the market felt that there were still important investors who were exposed to a spiral developing, of having to sell gilts in order to find cash, in order to meet demands in the market.”
Gieve suggested the Bank was being forced to take action as a consequence of the chancellor’s mini-budget, which promised £45bn of unfunded tax cuts directed at middle and high earners.
“The internal workings of the financial markets have thrown up an element of instability that the Bank is addressing. But the underlying move came on the back of the announcement of huge amounts of extra borrowing and tax cuts without a clear plan of how to pay for them,” he said.
In the final week of the emergency scheme, the Bank warned there were still financial stability risks for pensions funds in “liability driven investment” schemes, which have been caught out by the dramatic rise in UK government bond yields since the chancellor’s mini-budget.
“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the Bank said in a statement.
The move by the Bank to include purchases of index-linked gilts comes after it said on Monday it would loosen the criteria of the scheme.
It had promised to increase the capacity of its programme to £10bn a day from a previous level of £5bn to ensure there was sufficient capacity in the market before the end of the programme.
The Bank has used limited amounts of this overall capacity, buying less than £6bn out of its £65bn potential total so far.
Threadneedle Street said the enhancement of its programme to include index-linked gilts would run until 14 October, when its emergency intervention would still end as planned.