Bank of England widens emergency bond market scheme in fresh attempt to calm markets – business live | Business

The Bank of England has acted again to protect the UK’s government bond market because the markets are spooked by ‘Trussonomics’, explains Holger Schmieding, chief economist at Berenberg.

Schmieding says (via Retuters):

“The Bank of England has demonstrated with its recent temporary pivot that they are highly aware of market volatility and they are able to dampen it. So, I expect the interventions to work.

“But the need for them to intervene is a sign of how unsettled UK markets are in the wake of Trussonomics.

Schmieding added that the decision to start buying inflation-linked bonds is “a bit of a surprise”

“But they might intervene in various parts of the markets that are unsettled and that is partly a reflection of how the rate the exposure of major players.”

While the Bank is making a new attempt to calm the markets, its bond-buying programme is still due to end on Friday, points out Torsten Bell of Resolution Foundation:

Ed Conway of Sky News points out that the market reaction will be important – will this calm the selloff?

Former Financial Times editor Lionel Barber tweets that it’s ‘hard to understate’ the damage caused by Kwasi Kwarteng’s mini-budget:

Reuters’ Andy Bruce points out that the UK will auction £900m of long-dated index-linked gilts today – the pricing, and demand, for that sale will be interesting too….

This chart shows how the yield (interest rate) on long-term inflation-linked UK bonds has surged in recent months.

Yields rise when prices fall. These index-linked bonds are heavily bought by pension funds, to protect themselves against rising inflation.

So the drop in prices has hit pension funds hard.

The Bank of England must have been alarmed by the selloff in the UK bond market yesterday, explains Sir John Gieve, a former deputy governor of the Bank.

The tumble in prices yesterday prompted it to widen its operations to support financial stability today.

Gieve tells Radio 4’s Today Programme:

I think the moves yesterday must have alarmed them.

The message may have been, the market felt that there were still important investors who were exposed to a spiral developing, of having to sell gilts in order to find cash to meet demands in the markets.

That’s why they intervened the first time, and they must have decided they needed a bit longer to see those investors safe.

So by starting to buy index-linked bonds too, the BoE hopes to prevent investors being forced to sell into a falling market.

Gieve suggests that the bond-purchase programme could potentially be extended by a few more days, or even a couple more weeks, until Kwasi Kwarteng presents his medium-term fiscal plan on 31 October.

But even if that happened, the operation is still time-limited.

Newsflash: The Bank of England is expanding its emergency bond buying operation for the second time this week, in a fresh attempt to calm the markets and protect pension funds.

The central bank is widening the scope of its daily programme in which it buys up UK government debt, to include purchases of index-linked government bonds (which are linked to inflation).

Announcing the move, the Bank says there has been a “further significant repricing of UK government debt, particularly index-linked gilts”, which could threaten the UK’s financial stability.

It warns:

Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.

That ‘fire sale’ dynamic is driven by pension funds using the Liability Driven Investment strategy. As government bond prices fall, LDI funds are forced to sell assets to cover losses, driving prices lower.

The move will act as a “further backstop to restore orderly market conditions”, the Bank says, by mopping up excess sales of index-linked gilts which the markets can’t cope with.

This £65bn bond-buying programme is still due to end on Friday. Yesterday, the Bank doubled the size of its daily bond purchases, to a maximum of £10bn from £5bn.

But despite that move, UK borrowing costs hit the highest level since the turmoil immediately after the mini-budget.

This pushed the yield (or interest rates) on 30-year UK bonds up to 4.6% on Monday (from below 3% at the start of September).

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The perilous state of the UK’s public finances has been laid bare this morning, with an authorititive warning that Kwasi Kwarteng must find £62bn of spending cuts or tax rises to balance the books.

The Institute for Fiscal Studies says that the panicked reaction on international money markets to the chancellor’s “mini-budget” will drive up the size of the black hole in the UK finances, by increasing the the cost of extra borrowing.

My colleague Phillip Inman explains:

The £45bn cost of the mini-budget will wipe out any financial space left to the chancellor by his predecessor, swelling Britain’s debt as as share of national income for at least the next five years.

The IFS director, Paul Johnson, said that while it was “technically possible” for Kwarteng to balance the books via spending cuts, he warned public sector spending had already suffered a huge hit over the last decade and that there was “not much fat left to cut”.

The scale of the tax cuts in the mini-budget (to the basic rate of income tax, corporation tax and stamp duty) had prompted a seismic shock to the outlook for the public finances that left them deeper in the red, the IFS explained.

“This is because the permanent tax cuts were bigger than had been expected,” and because the expectations for Bank of England interest rates have rocketed to almost 6%, pushing mortgage rates towards 8%.

The government’s growth plans will only have a limited impact, the IFS says, meaning that hefty cuts to public services and tight control of welfare benefits, on a scale similar to the austerity a decade ago, would be needed to pay for those tax cuts.

Here’s the full story:

The International Monetary Fund will give its assessment on the global economy later today, as fears of a damaging downturn rise.

Last night, JPMorgan Chase chief executive Jamie Dimon predicted the American economy will tip into a recession next year, which could drive stocks lower create “panic” in the credit markets.

The agenda

• 7am BST: UK unemployment report

• 8am BST: Kantar’s latest supermaket grocery market share report

• 10am BST: Institute for Fiscal Studies presents its Green Budget 2022

• 2pm BST: International Monetary Fund releases its World Economic Outlook