The Bank of England will buy up U.K. government bonds to try to halt a dramatic sell-off as it warned of a “material risk to UK financial stability” in the wake of the government’s mini-budget.
The central bank said that it would today start buying long-dated government bonds at “whatever scale is necessary” in a bid to “restore orderly market conditions.”
“The Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets,” it said in a statement.
“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.”
The BoE described the purchases of the U.K. government debt, known as gilts, as “temporary and targeted” but said they would take place at an “urgent pace” until October 14.
The Bank also decided to delay sales of its own portfolio of gilts built up under its quantitative easing program since the 2008 financial crisis.
The sales were due to start next week but will now be postponed until October 31.
The intervention comes after the cost of U.K. government borrowing spiked dramatically and surpassed rates paid by Italy and Greece.
The yield on the 30-year benchmark gilt slid around 30 basis points on the news from above 5 percent to 4.77 percent.
U.K. Chancellor Kwasi Kwarteng’s plan for debt-funded tax cuts — unveiled without the usual scrutiny from independent fiscal watchdog the Office for Budget Responsibility — has also led to a plunge in the pound and sparked criticism from the International Monetary Fund.
The Treasury said in a statement that the Bank of England was responding to “a risk from recent dysfunction in gilt markets.”
“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,” it said.
Amid turmoil in the markets, Conservative MPs expressed anger at the plan unveiled by Kwarteng last Friday, which comes on top of a multibillion pound program of state subsidies to cap soaring energy costs for businesses and consumers.
One MP said of new Prime Minister Liz Truss that the “least bad option at this point would be to fire Kwasi.”
And they added: “Her fate is sealed. But this is her best hope of avoiding total catastrophe.”
Capital Economics said that the bank’s steps show “it is going to do all it can to prevent a financial crisis” but that U.K. markets are “in a perilous position.”
“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long,” the research consultancy said in a note.
“Either way, the downside risks to economic growth are growing. And the chancellor’s 2.5 percent real GDP growth target is looking even more unachievable.”
Kwarteng has promised more detail of his fiscal plan in the coming weeks, including independent costings from the OBR and a host of supply-side reforms.
Yet as allies of Truss — who won the Tory leadership on a tax-cutting, deregulatory agenda — clashed with the IMF, former Tory Chancllor George Osborne noted: “Odd to see free marketeers urging a free market government to ignore the markets.”
Eleni Courea and Matt Honeycombe-Foster contributed reporting.
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