Bank of England launches £65bn move to calm markets
The Bank of England took emergency action on Wednesday to avoid a meltdown in the UK pensions sector, unleashing a £65bn bond-buying programme to stem a crisis in government debt markets.
The central bank warned of a “material risk to UK financial stability” from turmoil in the gilts market sparked by chancellor Kwasi Kwarteng’s tax cuts and borrowing plan last week.
In spite of the prolonged market upheaval, City minister Andrew Griffith said the government would stick to its strategy: “We think they’re the right plans because those plans make our economy competitive,” he said.
Cardano Investment, which manages LDI strategies for about 30 UK pension schemes with roughly £50bn of assets, said it had written to the BoE on Wednesday.
“If there was no intervention today, gilt yields could have gone up to 7-8 per cent from 4.5 per cent this morning and in that situation around 90 per cent of UK pension funds would have run out of collateral,” said Kerrin Rosenberg, Cardano Investment chief executive. “They would have been wiped out.”
The Treasury on Wednesday tried to reassure markets by telling government departments to identify efficiency savings, stressing that they would have to live within very tight spending limits, already set until 2025.
Kwarteng’s allies said he would not resign, while one government insider said of Truss: “She’s very much not in the mood to budge and wants to tough it out.” Truss and Kwarteng said nothing publicly on Wednesday.
But Tory anger is mounting, with some warning that Truss faces a rebellion on key legislation, including possibly on the finance bill to enact the new package, when MPs return to the Commons in October.
Simon Hoare, Tory MP for North Dorset, tweeted: “These are not circumstances beyond the control of Govt/Treasury. They were authored there. This inept madness cannot go on.”
The BoE took the emergency measure after Kwarteng’s fiscal package last week sent the pound tumbling and set off historic falls in gilt prices.
After the announcement, 30-year gilt yields, which earlier on Wednesday had touched a 20-year high above 5 per cent, fell 1 percentage point to 4 per cent — their biggest drop for any single day on record, according to Tradeweb data. Yields fall when prices rise. Ten-year yields slipped to 4.1 per cent from 4.59 per cent.
The Treasury blamed “significant volatility” in “global financial markets”.
This story originally appeared on: Financial Times - Author:Harriet Agnew
