The Bank of England has stepped in to calm markets as it warned of ‘material risk’ to UK stability.
It has announced that it will be postponing quantitative tightening,the process of selling government bonds and instead will start start buying up long-term bonds.
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.”
Markets have quickly responded folowing the announcement with UK bonds surging.The yield on 30-year gilts plummeted 24 basis points to 4.75pc, while the 10-year was down to 4.1pc.
The Bank said that:
“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 monetary policy committee has been informed of these temporary and targeted financial stability operations.”
The Treasury has supported the move.In a statement it 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.”
