The central bank said it was monitoring “significant repricing” of UK and global assets in recent days.
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LONDON – The Bank of England will suspend plans to start selling gilt bonds next week and start buying long-term bonds on an ad hoc basis in a bid to quell market chaos over what the new government calls a “small budget”.
U.K. gilt yields were on track for their biggest monthly gain since at least 1957 as investors fled U.K. fixed-income markets following the announcement of new fiscal policy. The measures include a slew of unfunded tax cuts that have drawn global criticism, including from the International Monetary Fund.
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In a statement on Wednesday, the central bank said it was closely watching a “significant repricing” of U.K. and global assets in recent days, which has hit long-term U.K. government debt particularly hard.
“If the dysfunction in this market continues or worsens, there will be significant risks to UK financial stability. This will lead to an unwarranted tightening of funding conditions and reduced credit flows to the real economy,” the Bank of England said.
“In line with its financial stability objectives, the Bank of England stands ready to resume market functioning and reduce any risk to UK households and businesses from contagion to credit conditions.”
The central bank will begin temporary purchases of long-term UK government bonds from Wednesday to “restore orderly market conditions” and said it will make purchases “of any scale necessary” to reassure the market.
On Wednesday, the Bank of England’s Financial Policy Committee acknowledged that a dysfunctional gilt market poses a significant risk to the country’s financial stability and opted for immediate action.
The World Bank said the Monetary Policy Committee’s target of reducing gilt holdings by 80 billion pounds ($85 billion) a year remained unchanged, with the first gilt sales – originally scheduled for Monday – now due in October carried out on the 5th. 31.
A Treasury spokesman confirmed the operation had been “full compensation” by the Treasury and said Finance Minister Kwassi Kwaten was “committed to the independence of the Bank of England”.
“The government will continue to work closely with banks to support its financial stability and inflation targets,” the spokesman added.
The bank said it would issue a market announcement “soon” outlining the operational details of the scheme.
Yields on UK 30-year and 10-year government bonds fell by more than 30 basis points following the announcement.