Bank of England steps in to buy British bonds, warns of risk to financial stability

CNN Business

Bank of England said on Wednesday it would buy UK government debt “to whatever extent necessary” as part of an emergency intervention to stop bond market crash which, he warned, could threaten financial stability.

The investors were dumping the pound and british bonds since the government of new Prime Minister Liz Truss on Friday unveiled a huge package of tax breaks and increased borrowing aimed at getting the economy in motion and protecting households and businesses from sky-high energy bills this winter.

Markets fear that the plan will lead to higher inflation, forcing the Bank of England to raise interest rates to 6% next spring from 2.25% at present. Mortgage Markets been in turmoil all week as lenders struggled to price their loans. Hundreds of products have been recalled.

“This reassessment [of UK assets] has become more significant over the last day – and this is especially affecting the long-term public debt of the UK, ”the central bank said in a statement.

“If the dysfunction in this market continues or worsens, there will be a significant risk to the financial stability of the UK. This would lead to an unjustified tightening of financing conditions and a reduction in the inflow of credit into the real economy.”

In other words, the BoE is worried that markets could stall and that an economy that it believes is already in recession will suffer even more damage.

To prevent this from happening, the central bank said it would buy long-term UK government bonds by 14 October.

“Procurement will be made at whatever scale is necessary to achieve this outcome,” he added.

He confirmed that he would make a full assessment of the latest developments at his next scheduled meeting in November and take appropriate action.

” [bank] will not hesitate to change interest rates as much as necessary for a sustainable return of inflation to the target level of 2% over the medium term in accordance with its authority,” the statement says.

Yields on 10-year UK government bonds fell sharply after Wednesday’s announcement from the Bank of England, but remain high. The last time they were around 4.1% compared to less than 2.9% at the beginning of the month. However, the pound continued to fall, falling 0.4% to below $1.07.

Interest rates in the UK have risen seven times since December 2021. As part of its efforts to tighten monetary policy and curb inflation, which is now around 10%, the bank plans to sell £80bn worth of British government bonds annually. The bonds were purchased as part of an effort to support the economy during the pandemic.

On Wednesday, the company said it would keep that goal, but the start of sales was pushed back to October 31st.

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