Bank of England triggers emergency action as UK’s finances at risk

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The Bank of England (BoE) has announced it will be carrying out “temporary purchases of long-dated UK government bonds” in a desperate attempt to stabilise the UK economy after Kwasi Kwarteng’s mini-budget announcement last week sent the value of the pound plummeting. 

The announcement led to investors demand a greater rate of return for UK government bonds – which essentially act as IOUs – after the level of borrowing required to fund the giveaway, including tax cuts and energy aid for households and businesses, shocked the market.

The BoE warned that UK financial assets were facing “significant repricing”, adding that if this were allowed to continue, there was a “material risk to UK financial stability”.

It specified that the purpose of the bond purchases was to “restore orderly market conditions”, adding that they will be carried out “on whatever scale is necessary to effect this outcome”.

The auctions are set to take place from today until October 14. 

The bond-buying scheme will be funded by the bank’s reserves. 

 

In addition to these measures, the bank has postponed gilt sales that were due to start next week, pausing its reversal of quantitative easing.

However, it added it was retaining its goal to reduce its £838billion of gilt holdings by £80billion over the next year.

The BoE’s statement read: “As the Governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.

“This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.”

The statement added that the BoE is acting to “restore market functioning” and “reduce any risks from contagion to credit conditions for UK households and businesses.”

Earlier today, 30-year British government bond yields rose above 5 percent for the first time since 2002, following a sharp increase in sell-offs as the market reacted to the mini-Budget announcement. 

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