LAST UPDATE | 28 Sep 2022

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 UK’s central 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.

The Bank’s extraordinary intervention, responding directly to the UK government’s tax-cutting strategy, will pile further pressure on Prime Minister Liz Truss and Chancellor Kwasi Kwarteng to defend a vision for Britain’s economy that has spooked markets and shocked most mainstream economists.

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 also soared by the most in a five-day period since 1976, according to experts.

The scale of the crisis in the markets has led to unease in some quarters of the Tory party, while Labour has demanded that the Chancellor makes an urgent statement, with shadow chancellor Rachel Reeves calling the situation a “crisis made in No 10”.

The Liberal Democrats and the Scottish National Party have called for Parliament, which is on a conference recess, to be recalled.

The Bank of England 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.”

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”.

The central bank said it would buy bonds “on whatever scale is necessary” in order to steady gilts after Chancellor Kwarteng’s mini-budget last Friday spooked the markets with his package of tax cuts and increased borrowing.

It said the bond-buying programme would be temporary, starting from today until 14 October.

“The purpose of these purchases will be to restore orderly market conditions,” the Bank said.

It also postponed next week’s planned kick-off of its £80 billion (€89 billion) sale of gilts under the so-called quantitative tightening programme until 31 October.

Neither Kwarteng nor Truss have shown any willingness to step back from the policies announced on Friday, many of which made good on the promises she had delivered on her leadership campaign trail over the summer.

But the market angst in recent days has seen the Chancellor step up efforts to reassure the City about his economic plans after the International Monetary Fund (IMF) criticised the Government’s strategy – and as the pound suffered further falls today.

Mortgage borrowers have also been hit by a record overnight drop in the choice of home loan products as the economic fallout from Friday’s mini-budget continues.
Moneyfacts.co.uk said 935 fewer residential mortgage products were on the market on Wednesday compared with Tuesday – the highest since its records began – amid uncertainty over interest rates.

The Bank has been facing calls to convene an emergency meeting to consider hiking interest rates to try and counter the Government’s tax cut measures.

The Bank’s chief economist, Huw Pill, said yesterday a “significant monetary response” may be required, but signalled this would not come until policymakers are due to meet as scheduled in November.

Representatives from Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg were called to attend a meeting with Kwarteng today following days of turmoil.

In an extraordinary statement, the IMF said it was “closely monitoring” developments in the UK and was in touch with the authorities, urging the Chancellor to “re-evaluate the tax measures”.

It warned the current plans, including the abolition of the 45p rate of income tax for people on more than £150,000 (€176 million), are likely to increase inequality.

The pound suffered further falls this morning, falling back to 1.06 US dollars at one stage after reaching 1.08 US dollars yesterday.

The FTSE 100 Index also fell sharply after opening this morning, falling nearly 2% following market losses in the US overnight, before paring back declines.

The UK Chancellor insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth.