Things are moving fast in the financial markets. Andrew Bailey, the governor of the Bank of EnglandBank of England, put out a calm statement on Monday. Within 24 hours, it was clear that words were not going to be enough. There was evidence of a run on pension funds that forced them into a fire sale of their assets.
Threadneedle Street has had to step up its policy response as a result. In a matter of moments, the Bank said it would buy unlimited government gilts to stem the market panic. This is a U-turn for an institution that pledged less than a week ago to start actively running down its stock of government bonds, but the Bank was left with no alternative.
Since the financial crisis of 2008, the interest rate or yield on new long-term government borrowing had gone to 5% the highest level since the 2008 global financial crisis. The rapid upward move in gilt yields had an impact on mortgage rates, overdrafts, company loans and pension funds.
In the City's money markets, traders predicted the Bank would need to raise interest rates from 2.25% to 6%, a level that would be ruinous for an economy already in the early stages of the recession.
The Bank has responded with a new temporary and targeted round of quantitative easing QE, the bond buying programme that it originally launched in early 2009. After the Brexit vote in 2016 the Bank bought more gilts and again stepped into the market in response to the Covid-19 pandemic.
This is the fourth round of the QE and is intended to give the government some much needed breathing space and avoid the need for an emergency increase in interest, although it may prove necessary anyway if the boost from buying gilts proves short-lived.
The Bank is talking tough. An open-ended commitment to buying gilts will drive up their price and drive down their yields. The interest rate on gilts goes down as the price goes up.
There is a reason for that, because there is a reason for the prospect of more QE. The Bank can print as many electronic pounds as it likes to buy gilts because of the UK's own currency. It has unlimited firepower in theory.
Threadneedle Street was clear about why it had been forced, noting that dysfunction in the gilt market would pose a threat to financial stability if left unchecked. This is undoubtedly correct. The risk was that the negative reaction to Kwasi Kwarteng's mini budget would lead to a housing market crash and make it harder for pension funds and insurance companies to meet their liabilities. Paul Dales, chief UK economist at Capital Economics, said that this is not necessarily the end of the market mayhem. The fact that it needed to be done in the first place shows that the UK markets are in a very dangerous position. It wouldn't be a big surprise if another problem appeared in the financial markets before long. The Bank will be hoping that it has done enough to calm markets ahead of the meeting of its monetary policy committee on November 3 and a new fiscal statement from the chancellor on November 23. Both seem to be a long distance away after the events of the past five days.