LONDON — The Bank of England stepped up its intervention in the UK bond market on Tuesday. It warned of a “significant risk” to the country’s financial stability from a malfunction in some markets.
Britain’s financial markets have faced turmoil over the past two and a half weeks as investors rejected Prime Minister Liz Truss and the new government’s tax cuts and spending policies. Economists have widely criticized the policy over concerns that it would trigger inflation, already at its highest level in 40 years, and that rising interest rates would require massive borrowing. As bond prices fell, bond yields surged and many Britons faced higher mortgage rates. The International Monetary Fund said on Tuesday that government policies are “complicating” the central bank’s fight against inflation.
The sharp rise in yields, especially on long-maturity bonds, has left the investment strategies used by pension funds in turmoil. The Bank of England felt compelled to intervene by offering to buy government bonds, so much so that it postponed plans to sell its holdings on the market.
Initially, this contributed to lower bond yields, with the central bank saying the fund had made progress in improving its resilience to market volatility. But the ruckus is back as traders wonder what will happen once the bond-buying operation ends on Friday.
The central bank said on Tuesday that there had been a “substantial repricing” of government bonds, especially inflation-linked bonds, this week.
“This market dysfunction and the prospect of a self-reinforcing ‘fire sale’ dynamic poses material risks to the UK’s financial stability,” it added. in a statement.
The bank said it will end its bond purchases on Friday but will add up to £20bn of inflation-linked debt to assets it intends to buy in the final week of the programme. bought about £1.4bn of inflation-linked bonds and traditional government bonds known as gold coins.
At a meeting in Washington on Tuesday, Bank of England Governor Andrew Bailey vowed to end the bond-buying operation on Friday.
“I have announced that I will be leaving by the end of this week,” he said. “And my message to the funds involved and all companies involved in managing those funds: 3 days left. You must get this done.”
After he spoke, the British pound plummeted against the dollar from just under $1.12 to $1.10. The bond market had already closed for the day.
The central bank expanded inflation-linked debt shortly after other efforts by central banks and governments to ease market tensions.
The UK government announced Monday that it will advance the date of its next fiscal policy announcement by nearly a month, while also providing a much-needed independent assessment of the policy’s impact on the country’s economy and finances. .
Finance Minister Kwasi Kwarten said on October 31 he would announce a “medium-term financial plan”. This shows how the government will bring down debt levels despite massive spending plans and tax cuts from borrowing. .
New economic and fiscal forecasts from the government watchdog, the Office of Budget Responsibility, are expected to be released on the same day.
On Monday, the Bank of England tried to address continued malfunctions in bonds.said to do scale up intervention In the bond market by increasing the size of daily auctions with a bond buying program and setting up other facilities to improve the liquidity of pension funds.
The bank said on Monday it had only bought about £5bn of long-term government bonds in the first eight days of its bond-buying operation, despite setting a daily cap of £5bn. Before the program ended, the plan was to increase the size of the auction and set up new collateral lines to alleviate the liquidity problems facing pension funds. This will continue for the rest of the week.
Even with intervention, yields on long-term government bonds continued to climb, rising to 4.8% on Tuesday, again close to the highs seen during the worst bond crash since the last fiscal report.
Bailey said on Tuesday that he and Financial Stability Deputy Governor John Cunliffe had “stayed up all night” many times trying to fix problems in the bond market. “In the end, we didn’t have a targeted intervention,” Bailey said.
The Pensions and Lifetime Savings Association said on Tuesday that early central bank intervention was largely effective, but “recently, however, market confidence remains low.” The bank urged not to end bond purchases prematurely, saying many pension funds felt it should be extended at least until the end of the month.
Market turmoil continues amid skepticism about whether the government’s plans will expand the economy as promised. Instead, it will require significant reductions in public spending.
The IMF reiterated its warnings about the UK government’s policies on Tuesday. He cut his forecast for global growth and said inflation would persist more than previously expected, but said the UK would experience a “significant slowdown” as well. Government policies may provide some protection to growth, but they also “complicate the fight against inflation,” he said.
“We have seen a lot of turmoil in the gold leaf market recently,” IMF chief economist Pierre-Olivier Grinchat said at a news conference, adding that fiscal policy needs to be aligned with monetary policy objectives.
“It’s like having a car with two people in front of them, each with a steering wheel, trying to turn the car in a different direction,” says Grinchas. “That’s not going to work.”
Gianna Smirek Contributed to reporting from Washington.