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Bank of England intervenes in bond market over ‘pensions run’ concern

by: Emma Lunn
  • 29/09/2022
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Bank of England intervenes in bond market over ‘pensions run’ concern
The central bank has launched a bond-buying programme after the recent gilt sell-off in an attempt to stabilise the UK economy.

The move comes five days after the reaction to chancellor Kwasi Kwarteng’s mini Budget sent the pound into freefall and caused massive stock market losses.

Yesterday saw warnings that interest rates could rise to 6 per cent. This has had the knock-on effect of causing ructions in the mortgage market as lenders withdraw products and hike interest rates.

In a statement, the Bank of England (BoE) said it had been monitoring developments in financial markets very closely “in light of the significant repricing of UK and global financial assets”.

The bank will also postpone the planned start of its gilt sale programme.


Why has the Bank of England acted?

The BoE has intervened in a bid to stabilise the UK economy. The concern was there would be a huge run on pensions, similar to the run on Northern Rock at the start of the financial crisis. The bank said it would buy government bonds on a temporary basis to help “restore orderly market conditions”.

A statement from the BoE said: “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. 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.”


What is the Bank of England going to do?

The bank said it will carry out temporary purchases of long-dated UK government bonds from today (28 September). It said the purpose of these purchases will be “to restore orderly market conditions”.

The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.

The bank said these purchases will be strictly time limited and are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October.


What do the experts say?

Joshua Raymond of said: “This is a significant step by the Bank of England. The UK central bank first tried words, which failed. Now it tries to intervene in bond markets to bring yields back under control. On the one hand, this might bring some reassurance to the market that the BoE is ready to act outside of its scheduled meetings. This means it’s now much more likely we will see major interest rate hikes before the next MPC meeting in November.

“Yet on the other hand, the Bank of England is applying plasters on the financial wounds created by the Truss government who have shown no hint at reversing policy. So until that happens, the question remains how much further will the BoE be forced to intervene further and over what time period? Time will tell.”

Donald Phillips, co-head of the Liontrust Global Fixed Income Team, said: “This is a welcome piece of news in the short term, preventing for now a run on the gilt market. Ultimately, whilst inflation remains a problem, quantitative easing is unlikely to be anything other than a very short-term fix. Indeed, the bank is clear that quantitative tightening will recommence at the end of October.

“We hope this is buying the UK government time to address the flaws in their profligate fiscal policies, affording them some room to bring to parliament a plan based on the reality of the economy we have. Failure to address their fiscal plan, we believe, will likely lead to more pain in government bonds down the line.”

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