November 30, 2022

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To calm markets, BoE will buy bonds 'whatever scale is necessary'

To calm markets, BoE will buy bonds ‘whatever scale is necessary’

The Bank of England On Wednesday, it said it would temporarily buy British government bonds, a major intervention in financial markets after The new government’s financial plans Led to higher borrowing costs over the past few days.

The news brought some relief to the bond market, but the British pound resumed its decline, falling 1.7 percent against the dollar, to $1.05, returning towards Monday’s record low.

British government plans to boost economic growth by cutting taxes, especially for high-income earners, while spending to protect households from rising energy costs has been largely rejected by markets and economists, in part because of the large amount of borrowing that is required at a time of high interest rates and inflation. high. The International Monetary Fund issued an unexpected statement on the British economy on Tuesday, urging the government to “re-evaluate” its plans.

The Bank of England said the sell-off of British assets since Friday, when the government’s plan was announced, particularly affected long-dated bonds. “If the dysfunction in this market continues or worsens, there will be a material risk to the UK’s financial stability,” it said in a statement. She added that this would reduce the flow of credit to businesses and households.

“The purpose of these purchases will be to restore orderly market conditions,” the central bank added in its statement, which had an immediate impact on the markets. “Procurements will be carried out on any scale necessary to achieve this outcome.”

Bond auctions will take place from Wednesday through October 14.

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The yield on UK 10-year government bonds rose on Wednesday to 4.58% – the highest level since early 2008 – ahead of the central bank’s statement. Returns for the thirty-year period exceeded 5 percent for the first time since 2002.

After the announcement, bond yields fell sharply, with the 30-year yield dropping more than half a percentage point to about 4.35 percent.

The central bank statement echoes a famous promise by Mario Draghi in 2012, when he pledged as head of the European Central Bank to do “whatever it takes” to save the euro, which has come under severe pressure in the markets.

Wednesday’s intervention in Britain came after a central bank committee warned of risks to Britain’s financial stability as a result of the imbalance in the government bond market.

The British government’s comprehensive financial plan, presented without an independent financial and economic evaluation, caused investors to flee British assets. The The British pound fell to a record low against the US dollar On Monday, dealers suspected that the central bank would be forced to raise interest rates quickly, driving up short- and long-term borrowing costs.

The rapid rise in bond yields has disrupted Britain’s mortgage market, with some lenders withdrawing offers on new mortgages because it has become too difficult to price.

“The government’s decision to scrap some tax cuts, or cut spending sharply, will help relieve pressure” in the currency and bond markets, Samuel Tombs, an economist at Pantheon Macro Economics, wrote in a research note. But the actions it has taken so far has undermined confidence among global investors, something that cannot be easily restored. Accordingly, a painful recession caused by rising borrowing costs awaits us.”

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Market turmoil and central bank intervention reveal how inconsistent the government’s plans are with the bank’s monetary policy objectives. The government is trying to generate rapid economic demand, while the bank is trying to cool it down to reduce inflation.

On Tuesday, Hugh Bell, chief economist at the Bank of England, said the government’s fiscal plans would be met with ‘Great’ response from Bank of England officialswho are scheduled to meet again in early November.

Just last Thursday, the central bank said it would begin its plan to sell bonds back to the market as it tried to end a long era of easy money in its fight against inflation. She insisted there would be a “high impediment” for the bank to deviate from the plan, which over the next year will reduce its bond holdings by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was delaying the start of sales until the end of October.