By Editor Economic Affairs
London: The Bank of England made it official on Tuesday that it will carry out temporary purchases of long-dated UK government bonds from 28 September aiming to restore orderly market conditions.
The purchases will be carried out on whatever scale is necessary to effect this outcome and the operation will be fully indemnified by HM Treasury.
The financial market in the UK is passing through its critical phase. The pound tumbled to $1.0586 after the news, down 1.4% against the dollar.
It comes after the currency hit a record low on Monday following the chancellor’s mini-budget, which pledged $45bn worth of tax cuts, funded by borrowing, as part of a plan to boost economic growth.
“On 28 September, the Bank of England’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace. These purchases will be strictly time-limited. They are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October. The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided,” the Bank stated on Tuesday, in a press statement released by the bank.
Earlier on Monday, the Governor of the Bank of England said in his statement that the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.
“This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. 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,” the governor said.
In line with its financial stability objective, the governor of the Bank of England made it loud and clear that the bank stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
According to a press statement, the Monetary Policy Committee has been informed of these temporary and targeted financial stability operations. This is in line with the Concordat governing the MPC’s engagement with the Bank’s Executive regarding balance sheet operations. As set out in the Governor’s statement on Monday, the MPC will make a full assessment of recent macroeconomic developments at its next scheduled meeting and act accordingly.
The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.
The MPC’s annual target of an £80bn stock reduction is unaffected and unchanged. In light of current market conditions, the Bank’s Executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter.
According to BBC, there has been widespread criticism of the government’s plan, with the International Monetary Fund warning on Tuesday that the measures are likely to fuel the cost-of-living crisis and increase inequality.
The government says it will not reverse its tax cuts, but has promised to release further plans to boost growth and reduce public debt on 23 November. In a statement, the Treasury acknowledged global financial markets had seen “significant volatility” in recent days.
It said Chancellor Kwasi Kwarteng was “committed” to the Bank’s independence, adding: “The government will continue to work closely with the Bank in support of its financial stability and inflation objectives.”
But Labour called on the chancellor to urgently clarify how he planned to stabilise the economy. Shadow chancellor Rachel Reeves said people would be “deeply worried” about the cost of their mortgage, their pensions, and the cost of living.
“The Chancellor must make an urgent statement on how he is going to fix the crisis that he has made.”
“The Bank will shortly publish a market notice outlining operational details,” the governor said.
