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The Bank of England on Wednesday announced that it will carry out temporary purchases of long-dated gilts, after recent instability in the UK government bond market.
The central bank said the purpose of the ‘purchases will be to restore orderly market conditions’ after UK government bonds were significantly affected by ‘repricing’. The purchases, which will start on Wednesday, will be carried out on ‘whatever scale is necessary to effect this outcome.’
The bank confirmed that the purchases will be ‘strictly time limited’ and ‘fully indemnified by HM Treasury’, referring to the UK government.
Justifying the decision, the Bank of England said that continued dysfunction would be ‘a material risk to UK financial stability’. The BoE's Financial Policy Committee promoted the plan on the grounds of ‘financial stability’.
The central bank's interest-rate setting Monetary Policy Committee clarified that although its annual target of an £80 billion stock reduction is ‘unaffected and unchanged’, the beginning of gilt sale operations has been postponed to October 31. It reaffirmed that it ‘will not hesitate to change interest rates by as much as needed to return inflation to the 2% target’.
Yields on gilts widened and the pound plummeted to its lowest level ever against the dollar, after Chancellor Kwasi Kwarteng unveiled a series of unfunded tax cuts on Friday last week.
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