Bank Of England To Purchase Gilt Bonds To Stabilize Market

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Bank of England; Photo Source: Politico
As per the Bank of England’s statement, “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 Bank of England revealed its plans to start unlimited gilt bond purchases until October 14 to stabilize its financial market.

The announcement came as the government’s proposed tax cut caused a fall in the prices of the British pound and gilts.

A few days ago, Chancellor Kwasi Kwarteng’s mini-budget proposed one of the biggest tax cuts in the last 50 years to target a 2.5% growth rate. This caused the value of the pound sterling to fall as low as $1.035 by September 26. Moreover, gilts also faced a severe decline, causing some pension funds to face margin calls. 

In response, the Bank of England decided to intervene in the bond market. To restore orderly market conditions, the BOE will purchase long-term UK bonds starting September 28. 

It claimed that purchases will be time-limited and will tackle a “specific problem” in the bond system. Additionally, all purchases will be unwound when the market stabilizes.

The bank assured investors that the purchases will be carried out on “whatever scale is necessary.” It has also delayed the program to sell its government bond holdings worth 838B pounds scheduled to begin next week. 

Unfortunately, the British pound weakened shortly after the bank announced its plans. As of writing this article, the pound is still priced at $1.068. 

According to Mike Owens, a Sales trader at Saxo Capital Markets,

“It’s a narrowly defined intervention that hopes to dampen the current shocks.”

Meanwhile, the bond yields fell after hitting multi-year highs following BOE’s announcement. The bank previously stated it would not shy away from increasing interest rates. Analysts have speculated that the bank might resort to hiking the interest rates from 2.25% to 5.8% by Spring 2023.

Written by
Ayush Pande
As per the Bank of England’s statement, “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 Bank of England revealed its plans to start unlimited gilt bond purchases until October 14 to stabilize its financial market.

The announcement came as the government’s proposed tax cut caused a fall in the prices of the British pound and gilts.

A few days ago, Chancellor Kwasi Kwarteng’s mini-budget proposed one of the biggest tax cuts in the last 50 years to target a 2.5% growth rate. This caused the value of the pound sterling to fall as low as $1.035 by September 26. Moreover, gilts also faced a severe decline, causing some pension funds to face margin calls. 

In response, the Bank of England decided to intervene in the bond market. To restore orderly market conditions, the BOE will purchase long-term UK bonds starting September 28. 

It claimed that purchases will be time-limited and will tackle a “specific problem” in the bond system. Additionally, all purchases will be unwound when the market stabilizes.

The bank assured investors that the purchases will be carried out on “whatever scale is necessary.” It has also delayed the program to sell its government bond holdings worth 838B pounds scheduled to begin next week. 

Unfortunately, the British pound weakened shortly after the bank announced its plans. As of writing this article, the pound is still priced at $1.068. 

According to Mike Owens, a Sales trader at Saxo Capital Markets,

“It’s a narrowly defined intervention that hopes to dampen the current shocks.”

Meanwhile, the bond yields fell after hitting multi-year highs following BOE’s announcement. The bank previously stated it would not shy away from increasing interest rates. Analysts have speculated that the bank might resort to hiking the interest rates from 2.25% to 5.8% by Spring 2023.

Written by
Ayush Pande