The Bank of England today announced an emergency government bond-buying programme to stave off a “material risk to UK financial stability” that could see borrowing costs spiral.
The central bank said it was stepping in to buy gilts at an “urgent pace” after fears over the UK Government’s economic policies following Kwasi Kwarteng's mini-budget sent the pound tumbling and sparked a sell-off in the gilts market.
The pound hit an all-time record low of 1.03 against the US dollar on Monday. But also 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-year period since 1976.
A statement from the Bank 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 Bank of England said it would buy bonds “on whatever scale is necessary” in order to steady gilts, after Chancellor Kwasi Kwarteng’s mini-budget last Friday spooked the markets with a package of tax cuts and increased borrowing.
It said the bond-buying programme would be temporary, starting from today until 14 October.
The Bank of England also postponed next week’s planned kick-off of its £80bn sale of gilts, under the so-called 'quantitative tightening' programme until 31 October.
Labour's Rachel Reeves has called for an “urgent statement” from the Chancellor to address “the crisis that he has made”.
The shadow chancellor said of the Conservatives: “Their decisions will cause higher inflation and higher interest rates – and are not a credible plan for growth.
“The Chancellor must make an urgent statement on how he is going to fix the crisis that he has made.”
Sir Charlie Bean, a former deputy governor of the Bank of England, has said that despite Wednesday’s intervention by the Bank, interest rates will still likely need to rise.
Speaking to BBC News, Sir Charlie said: “The need for an immediate rate increase is much reduced. It is not going to go away though.
“It is likely that accompanying the fiscal expansion that was announced at the end of last week, the bank will have to significantly raise interest rates.
“The financial stability action today is not going to change the fact that mortgage interest rates will be rising in the future.”
He also told the broadcaster that a rapid market response could be anticipated, following the Bank of England’s announcement.
“Merely the fact of the bank standing ready to purchase UK government bonds automatically helps to stabilise the market, and I have to say this is clearly the right thing to do.”
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