The Bank of England said on Wednesday it would buy UK debt on whatever scale necessary in an emergency intervention to halt a bond market crash that it warned could threaten financial stability.
Since the government of the new prime minister Liz Truss unveiled a huge package of tax cuts and increased borrowing that will help the economy move and protect households and businesses from sky-high energy bills this winter, investors have been dumping the pound and UK bonds.
Markets fear the plan will drive up inflation, forcing the Bank of England to push interest rates as high as 6% next spring, from 2.25% at present. Mortgage markets have been in turmoil all week because lenders haven't been able to price their loans. Hundreds of products have been withdrawn.
The central bank said in its statement that this repricing of UK assets has become more significant in the past day and is particularly affecting long-dated UK government debt.
There would be a significant risk to the UK's financial stability if we had dysfunction in this market. This would lead to a tightening of financing conditions and a reduction of the flow of credit to the real economy. The Bank of England is worried that markets could seize up and the economy would suffer even worse damage, as it believes it has already entered a recession.
To prevent that happening, the central bank said it would buy long-dated UK government bonds until October 14.
It said that the purchases would be carried out on whatever scale necessary to achieve this outcome.
It stated that it would make a full assessment of recent developments at its next scheduled meeting in November and that it would act accordingly.
In the medium term, the bank will not hesitate to change interest rates, as much as necessary to return inflation to the 2% target in the medium term, in line with its remit, it said.
Yields on 10 year UK government bonds fell sharply after the Bank of England announced on Wednesday but remain elevated. They were last near 4.1%, up from under 2.9% at the beginning of the month. However, the pound fell 0.4% to below $1.07.
Since December 2021, interest rates in the UK have risen seven times. As part of its efforts to tighten monetary policy and get a grip on inflation, the bank plans to sell 80 billion of UK government bonds each year. The bonds were bought in an effort to prop up the economy during the Pandemic.
It said Wednesday it would retain that target but that the start of sales had been pushed back until October 31.