Bank of England boosts plan to calm market turmoilon October 10, 2022 at 8:04 am

The Bank of England has announced new measures aimed at ensuring an “orderly end” to its emergency bond buying scheme, which it brought in when some pension funds were at risk of collapse.

The Bank says that it will now buy up to £10bn of government bonds on Monday, double the previous limit of £5bn.

So far the Bank has bought only around £5bn bonds under the £65bn programme.

The scheme was introduced after the government’s mini-budget sparked turmoil on financial markets.

The Bank reaffirmed that the scheme would finish at the end of this week on 14 October.

With the deadline for the Bank’s emergency bond-buying programme fast approaching, there have been worries that the turmoil that had been seen in financial markets would return once the scheme ends.

However, Russ Mould, investment director at AJ Bell, said the Bank was taking the approach of “talking loudly and carrying a big stick”, in its attempt to calm worries.

He also said the Bank’s package of measures aimed to show the pension funds that “we’ve got your back”.

The mini-budget – which was announced on 23 September – pledged £45bn of tax cuts as part of a plan to boost economic growth, but the level of government borrowing required shocked investors who questioned the sustainability of the public finances.

In the aftermath of the statement, the pound hit a record low and investors demanded a much higher return for investing in government bonds, causing some to drop sharply in value.

Certain types of funds in the pension industry, which invest in bonds, were forced to start selling, sparking fears of a fresh market downturn.

When the Bank stepped in last month, it said its decision to buy government bonds was driven by concern over “a material risk to UK financial stability.”

The government borrows money to fund its spending plans by selling bonds, or “gilts”, to investors such as pension funds and big banks on international markets.

But a collapse in the price of those bonds in the aftermath of the mini-budget was forcing some funds to rush to sell bonds further forcing down the price.

If that process had continued, there was a risk that those pension funds could have got to a position where they could not pay their debts.

In its latest statement, the Bank said there had been “substantial progress” in addressing the financial problems facing these funds, which had faced the prospect of having to make forced sales of £50bn of bonds.

The Bank has not bought as many government bonds as it had allowed for under the £65bn programme, and will make available all the unused capacity this week.

It has also announced further assistance for pension funds to help improve their financial position.

Before the mini-budget, the yield on government borrowing over a 30-year period stood at about 3.7%. The yield is effectively the interest rate.

After the mini-budget it jumped to 5.1% until the Bank’s intervention pushed the rate back down. However, in recent days it has crept back up again to around 4.4%.