Bank of England launches emergency bond-buying action

28 Sep 2022 4 minute read

The Bank of England, in the City of London. Photo Yui Mok PA Images.

The Bank of England has launched an emergency UK Government bond-buying programme to prevent borrowing costs from spiralling out of control and stave off a “material risk to UK financial stability”.

The Bank announced it was stepping in to buy Government bonds – known as gilts – at an “urgent pace” after fears over the Government’s economic policies sent the pound tumbling and sparked a sell-off in the gilts market.

While the pound hit an all-time record low of 1.03 against the US dollar on Monday, the yield on 10-year gilts – which is a proxy for the effective interest rate on public borrowing – has soared by the most in a five-year period since 1976, according to experts.

The Bank said: “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.

“In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

Treasury statement

The Treasury responded by reaffirming its commitment to the Bank of England’s independence and said the Government “will continue to work closely with the Bank in support of its financial stability and inflation objectives”.

It comes as Chancellor Kwasi Kwarteng has been stepping up efforts to reassure the City about his economic plans after the International Monetary Fund criticised the Government’s strategy – and as the pound suffered further falls on Wednesday.

A Treasury spokesperson said: “The Bank of England, in line with its financial stability objective, carefully monitors financial markets and any potential risk to the flow of credit to the real economy, and subsequent effects on UK households and businesses.

“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 in order to restore orderly market conditions.

“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.

“The Chancellor is committed to the Bank of England’s independence. The Government will continue to work closely with the Bank in support of its financial stability and inflation objectives.”

An influential Conservative peer and former Brexiteer has suggested the market chaos of recent days has been driven by concerns over a possible Labour government rather than the Government’s own economic policy.

Concerns dismissed

Former Secretary of State for Wales Sir John Redwood, a Tory MP and prominent Liz Truss supporter, has dismissed the concerns raised by the International Monetary Fund over the economic plan put forward by the Government.

Appearing on Sky News, he said: “The IMF were very wrong, as was the Bank of England, over the inflation which they now rightly worry about. They didn’t warn us or the other central banks in the run up to the big inflation, that the monetary policies of 2021 were far too loose, interest rates far too low, and the money printing was getting out of control. It’s a great pity they didn’t warn about that.

“Now they should be looking forward”, he said.

“We should be fighting recession. Of course, we must be prudent with finances. But the truth is that if the austerity policies have their way and we have a big recession, the borrowing won’t go down, the borrowings will soar.”

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