UK Fiscal and Monetary Policies 'Out of Step': Blinder
The Bank of England said it would buy long-dated UK government bonds in whatever quantities were needed to restore order to the market, sending gilts surging as the central bank launched its biggest response yet to the fallout from Prime Minister Liz Truss’s historic tax-cutting plan.
UK 30-year yields were set for the biggest drop on record after the announcement, which also saw officials delay the start of their quantitative-tightening plan, due to begin on Monday. The yields earlier climbed to the highest level since 1998.
The move was recommended by the Financial Policy Committee, in response to the risk of dysfunction that could cause “unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy. It is not a monetary policy decision.
“The purpose of these purchases will be to restore orderly market conditions,” the BOE said in a statement. “The purchases will be carried out on whatever scale is necessary to effect this outcome,” language reminiscent of former European Central Bank President Mario Draghi’s 2012 pledge to do “whatever it takes” to save the euro.
The BOE gilt buying operation will be fully indemnified by HM Treasury.
The BOE added the purchases will be strictly time limited and “are intended to tackle a specific problem in the long-dated government bond market.” Auctions will take place from today until Oct. 14.
The yield on 30-year bonds fell 63 basis points to 4.35 per cent as of 11:37 a.m. In London. Ten-year yields fell 43 basis points to 4.07 per cent and the pound slid 0.5 per cent to US$1.0675.
The return to bond buying comes just days before the BOE was due to start selling the mammoth holdings of securities it built up since the financial crisis. It said it would postpone the plan until Oct. 31.
Just yesterday, Chief Economist Huw Pill said the bank’s program of government bond sales should go ahead as planned next week if the market repricing stays orderly.
The BOE said a monetary policy response to the fiscal plan will probably come in November.
“The MPC will make a full assessment of recent macroeconomic developments at its next scheduled meeting and act accordingly,” it said. “The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit.”