Status: 10/11/2022 2:36 p.m
The Bank of England has had to intervene in the bond market twice in quick succession. She now wants to buy up government bonds for up to ten billion pounds a day. This should allay concerns about the new government’s fiscal policy.
Concerned about Britain’s financial stability, the Bank of England is expanding its support purchases in the British government bond market. To reassure investors, the country’s central bank has released another category of paper for emergency purchases.
In addition to long-term government bonds, the Bank of England now also wants to purchase government bonds that are linked to the inflation rate, as the currency watchdog announced today. So far, only regular long-dated British government bonds have been bought.
Bonds for up to ten billion a day
Only on Monday did the central bank announce a doubling of the total volume of emergency bond purchases. By the middle of the month, the Bank of England plans to invest up to ten billion pounds a day in government bonds. The maximum amount is now divided equally between long-dated government bonds and inflation-linked bonds.
According to media reports, at the beginning of the week there were disruptions on the market for inflation-indexed paper, which the central bank apparently wants to curb with the purchases.
Interventions according to government plans necessary
The Bank of England started its market interventions at the end of September. The reason for this was the great uncertainty on the market due to the tax and economic stimulus plans of the new government under Prime Minister Liz Truss.
For fear of a sharp rise in government debt and even higher inflation rates, the prices of British government bonds fell drastically, while yields rose sharply in return. This, in turn, had put pressure on many pension funds, which are heavily invested in long-dated bonds. The International Monetary Fund (IMF) and rating agencies had warned of the government’s plans.
Growing Doubts About Trussonomics
In view of another bond market sell-off, the Bank of England spoke of a “material threat” to financial stability, which the central bank wanted to counter with the additional emergency measures. Deputy Prime Minister Therese Coffey said she was “absolutely confident” that people’s pensions were secure.
According to Holger Schmieding, chief economist at Berenberg Bank in London, the central bank’s recent intervention shows “how unsettled the British markets are after Trussonomics”. “Trussonomics” is the name given to Prime Minister Truss’ attempt to stimulate the economy with tax cuts.
Last week, the British government withdrew the originally planned abolition of the top tax rate. In addition, the budget should be presented in October instead of as planned at the end of November BBC reported. This should also win back lost confidence in the financial markets.
Big rate move ahead
The announcements by the Bank of England also had a calming effect on the value of the British pound. The British currency has been stable at around $1.10 since yesterday. Experts are now expecting a significant rate hike in Great Britain: “We believe that the central bank is laying the foundation for a major interest rate adjustment in November, which without such measures could lead to market disruption,” said Simon Harvey, chief foreign exchange analyst at Brokerage house Monex.
Investors see the probability of a full percentage point hike at around 75 percent. Some are even betting on a step of 1.25 percentage points.