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Bank of England to buy UK government bonds in attempt to calm markets – POLITICO


The Bank of England will buy UK government bonds in a bid to stop a dramatic selloff as it warned of a ‘significant risk to UK financial stability’ following the government’s mini budget .

The central bank said it would start buying long-term government bonds today on “any scale necessary” in a bid to “restore orderly market conditions”.

“The Bank is monitoring financial market developments very closely in light of the significant revaluation of UK and global financial assets,” it said in a statement.

“This revaluation has become more significant over the past day – and it particularly affects UK long-term government debt. If the dysfunction of this market were to continue or worsen, there would be a significant risk for the financial stability of the United Kingdom.

The BoE described purchases of Britain’s government debt, known as gilts, as “temporary and targeted”, but said they would take place at an “urgent pace” until October 14.

The Bank has also decided to delay sales of its own portfolio of gilts built up under its quantitative easing program since the 2008 financial crisis.

Sales were due to start next week but will now be postponed until October 31.

The intervention comes after the cost of UK government borrowing rose dramatically and exceeded the rates paid by Italy and Greece.

The yield on the benchmark 30-year gilt slipped about 30 basis points after the news, falling from over 5% to 4.77%.

UK Chancellor Kwasi Kwarteng’s plan for debt-funded tax cuts – unveiled without the usual scrutiny by the independent budget watchdog, the Office for Budget Responsibility – also sent the pound plummeting and sparked criticism from the International Monetary Fund.

The Treasury said in a statement that the Bank of England was responding to “a risk of recent dysfunction in gilt markets.”

“These purchases will be strictly time-limited and completed within the next two weeks. To enable the Bank to carry out this financial stability intervention, this operation has been fully indemnified by Her Majesty’s Treasury,” he said. .

Amid the market turmoil, Tory MPs expressed anger at the plan unveiled by Kwarteng last Friday, which comes on top of a multi-billion pound scheme of government grants aimed at curbing soaring energy costs for businesses and consumers.

One MP said of new Prime Minister Liz Truss that ‘the least bad option at this stage would be to fire Kwasi’.

And they added: “His fate is sealed. But it is his best hope to avoid total disaster.”

Capital Economics said the actions taken by the bank show “it will do all it can to avoid a financial crisis” but UK markets are “in a perilous position”.

“It wouldn’t be a huge surprise if another issue in financial markets surfaced before long,” the research consultancy said in a note.

“Either way, the downside risks to economic growth are growing. And the Chancellor’s 2.5% real GDP growth target looks even more unachievable.

Kwarteng has promised more details of its fiscal plan in the coming weeks, including OBR’s standalone costs and a host of supply-side reforms.

Yet as allies of Truss – who won the Tory leadership on a tax cut and deregulation agenda – have clashed with the IMF, former Tory Chancellor George Osborne Noted“It’s strange to see free marketers urging a Liberal government to ignore markets.”

Eleni Courea and Matt Honeycombe-Foster contributed reporting.

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