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Bank of England steps in to buy UK bonds to stem market turmoil

The Bank of England. Photo: Reuters/Maja Smiejkowska
The Bank of England will launch a temporary UK government bond-buying programme. Photo: Maja Smiejkowska/Reuters

The Bank of England (BoE) has been forced to stem a crisis in bond markets amid market turmoil that has sent government borrowing costs soaring.

The central bank said it will launch a temporary UK government bond-buying programme as an emergency move to stave off a "material risk to UK financial stability".

UK chancellor Kwasi Kwarteng’s plans to cut taxes have sent the pound to record lows and, along with expectations of an aggressive rates rises, put pension funds under pressure to sell bonds to stave off solvency.

Threadneedle Street will now start buying bonds to stabilise what it described as "dysfunctional markets", abandoning previous plans to sell bonds.

The Bank said in a statement: "This repricing has become more significant in the past day — and it is particularly affecting long-dated UK government debt.

"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.

"This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy."

The BoE didn’t give an exact figure of how much it will purchase but said they will be carried out on "whatever scale is necessary", adding the Treasury would underwrite any losses.

Read more: Why has the pound fallen and what does this mean for you?

The BoE's move follows markets' concerns over government bond markets, adding that the action would be "strictly time limited".

It will carry out the temporary purchases of long-dated UK government bonds from 28 September until 14 October.

The Treasury responded by reaffirming its commitment to the Bank’s independence and said the government "will continue to work closely with the Bank in support of its financial stability and inflation objectives".

Read more: Pound run: BoE chief economist signals 'significant monetary response'

It comes as the Financial Policy Committee (FPC) sounded the alarm that the negative reaction to last week’s statement was threatening the UK’s financial stability.

The FPC said it "welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace".

Meanwhile chief economist Huw Pill on Tuesday signalled that the Bank was ready to significantly ramp up interest rates to shore up the pound and guard against increased inflation.

"It is hard not to draw the conclusion that all this will require significant monetary policy response," Pill told a conference. "We must be confident in the stability of the UK’s economic framework."

Government bond yields have surged to a 14-year high on Wednesday, following the International Monetary Fund’s rebuke of the government’s fiscal plan, increasing government borrowing costs.

The yield, or interest rate on the benchmark 10-year gilt, rose as high as 4.56%, the highest since the financial crash in 2008, and is now trading at 4.51%. The two-year gilt climbed to 4.67%.

Watch: How does inflation affect interest rates?