UK Central Bank Intervenes in Bond Market After Budget Turmoil

The central bank of the United Kingdom intervenes in the bond market to bring down the sharply increased yields on British government bonds.

 

It has rapidly become more expensive for the British government to borrow amid concerns about Prime Minister Liz Truss’s new budget plans. Therefore, the Bank of England (BoE) announced on Wednesday that it would buy up long-term British government bonds to prevent lending from coming to a standstill.

According to the central bank, financial stability was under pressure from rising yields on gilts, as British government bonds are called. The BoE added that it would buy as many bonds as possible to calm bond markets again.

However, the intervention will have a limited duration and have one specific goal. The BoE will buy long-term bonds from Wednesday to October 14.

If the yield on a bond rises, it means that the value of the debt security falls. Before the announcement of the BoE, gilt yields hit their highest level since 1998. The British pound has also fallen sharply in recent days.

The gilts fell hard after the announcement of the so-called mini-budget of the recently appointed Minister of Finance, Kwasi Kwarteng. He announced hefty tax cuts last week without compensating for the lost tax benefits with other income. At the same time, the United Kingdom has to spend a lot on compensating measures for the increased energy costs. The budget deficit is therefore expected to rise sharply.

The BoE wanted to start selling the many bonds the central bank had been buying since the financial crisis. The start has now been postponed to the end of October. However, the BoE remains committed to the goal of reducing its balance sheet by 80 billion pounds annually.

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