Bank Of England Steps Up Measures To Calm Financial Market

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The Bank of England has stepped up measures to calm the bond markets again and the bank repeatedly cautioned about a material risk to the financial stability.

In a statement released Tuesday, the BoE said it will widen the scope of daily gilt purchase operations to mitigate the dysfunction in the market.

The bank decided to include the index-linked gilts to its daily bond purchases. This enhancement will be in effect from October 11 to 14.

The latest addition to operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity, the central bank said.

As announced on Monday, the BoE stands ready to purchase up to GBP 10 billion of gilts each day, of which up to GBP 5 billion will be allocated to long-dated conventional gilts and up to GBP 5 billion to index-linked gilts.

The British pound has severely weakened against the US dollar and UK debt yields surged since Chancellor’s Kwasi Kwarteng’s mini budget announcement on September 23 that included tax cuts for the rich.

After coming under severe criticism, including from the IMF, for such a relaxation and more debt-derived fiscal support, the government decided to abandon its plan to scrap the 45 percent tax rate.

Following the mayhem in the financial markets, the BoE intervened in the government bond markets. The bank assured that it will carry out whatever scale of purchases that is necessary to restore orderly market conditions.

Rating agency Moody’s warned the UK of a rating downgrade, and peers S&P and Fitch assigned a “negative outlook” to the country’s credit ratings.

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