The Bank of England will carry out temporary purchases of long-dated UK government bonds from 28 September in an effort to restore orderly market conditions. In a statement it said the purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.
Sandra Holdsworth, head of rates at Aegon Asset Management, said, “Selling in both the conventional and index linked gilt market has been intense in recent days. This has led to a huge demand for cash to support derivative structures popular amongst pension funds. Cash has been raised by selling more gilts, the prices fall and the circle continues.”
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 are then planned to 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 in line with rules governing the MPC’s engagement with the Bank’s Executive regarding balance sheet operations.
On Monday the BoE governor, Andrew Bailey, said, “The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets … The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.”
As set out by the BoE’s governor statement on Monday, the MPC will make a full assessment of recent macroeconomic developments at its next scheduled meeting and act accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.
The MPC’s annual target of an £80 billion stock reduction is unaffected and unchanged. In light of current market conditions, the Bank’s executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter.