Bank of England intervenes to buy UK bonds, warns of risk to financial stability

CNN business

The Bank of England said on Wednesday it would buy UK government bonds “to any extent necessary” as part of emergency intervention to halt a bond market meltdown it warned could endanger financial stability.

Since the government of new Prime Minister Liz Truss on Friday unveiled a huge package of tax cuts and increased borrowing aimed at stimulating the economy and shielding households and businesses from sky-high energy bills this winter, investors have taken the pound and British bonds dropped.

Markets fear the plan will push inflation higher, forcing the Bank of England to raise interest rates to 6% from the current 2.25% next spring. Mortgage markets were in turmoil all week as lenders struggled to price their loans. Hundreds of products have been withdrawn.

“This price adjustment [of UK assets] has gained prominence over the past day – and it’s affecting long-term UK sovereign debt in particular,” the central bank said in its statement.

“Should dysfunction in this market persist or worsen, there would be a significant risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction in the flow of credit to the real economy.”

In other words, the Bank of England fears that markets could falter and that the economy – which it believes is already in recession – would suffer even worse damage.

To prevent this, the central bank announced that it would buy long-dated UK government bonds until October 14th.

“Purchases will be made to any extent necessary to achieve this result,” she added.

It reiterated that it would make a full assessment of the latest developments and act accordingly at its next scheduled meeting in November.

“That [bank] will not hesitate to change interest rates as necessary to bring inflation back to the 2% target on a sustainable basis in the medium term, in line with its mandate,” she said.

10-year UK government bond yields fell sharply following the Bank of England’s announcement on Wednesday but remain elevated. They were last at 4.1%, up from under 2.9% at the start of the month. However, the pound continued its decline, slipping 0.4% to below $1.07.

UK interest rates have risen seven times since December 2021. The bank plans to sell £80 billion worth of UK government bonds each year as part of its efforts to tighten monetary policy and rein in inflation, which is now close to 10%. The bonds were bought as part of an effort to shore up the economy during the pandemic.

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