The Bank of England has launched a temporary bond-buying programme as it takes emergency action to prevent “material risk” to UK financial stability.
It revealed that it would buy as many long-dated government bonds as needed between now and 14th October in a bid to stabilise financial markets in the wake of the mayhem that followed the government’s mini-budget last Friday.
It has seen investors demand a greater rate of return for UK government bonds – essentially IOUs – as the level of borrowing required to fund the giveaway, including tax cuts and energy aid for households and businesses, shocked the market.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the Bank said in a statement.
“This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”
The Bank said the purchases, which would be fully covered by the Treasury in the event of any losses, were designed to restore orderly market conditions.
It added that it would sell back the bonds it purchased once market conditions had stabilised.
The announcement certainly had an immediate effect.
Data showed that 30-year bond yields fell back below 5% having risen to levels not seen since 2022 earlier in the day.
The yields also fell back on other long-dated bonds.
In addition to its bond-buying action, the Bank said it would postpone the start of its efforts to unwind the sale of bonds it acquired through financial crisis and COVID crisis era quantitative easing.
The Bank had planned to reduce its £838bn of gilt holdings by £80bn over the next year.