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Bank of England to buy gilts to restore orderly market conditions

ended 28. September 2022

The Bank of England has just announced it “will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury”. Few Qs:

  • What are your initial thoughts on this?
  • Will it achieve much or be interpreted as a sign of desperation by markets?
  • Could the Government backtrack on its mini-Budget following the current extreme volatility?
  • What could this mean for Sterling?

Any other thoughts, jot them down. This story is BREAKING.

10 responses from the Newspage community

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Editor
Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
As soon as the bank announced this, gilt rates dropped half a percent. This was a much needed intervention in the market, the only other alternative being to jack rates up by up to 2%. This would have crushed homeowners with mortgages. It’s further evidence that the mini-Budget was a disaster, with even the IMF advising the government to change course.
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Wes Wilkes
CEO at IronMarket Wealth
Getting dizzy with U-turns. Today's contrarian action from the Bank of England has come from necessity. Necessity which has come from uncoordinated government policy. We will have to see how markets react. Pre-2022 we would expect this to be regarded as a supportive measure and such stability is usually helpful. However, for the last 3 days we have seen Sterling Weakness, a huge rise in nominal and real yields and lower implied inflation. Ultimately, stability is good & whilst this is utterly contrary to the current tightening period, any stability right now is welcomed. It feels like we should see back track from the mini-Budget, however, right now it seems that political credibility is being placed above economic credibility!
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Philip Dragoumis
Director and Owner at Thera Wealth Management
Truss and Kwarteng's mini budget broke the UK gilt market on Friday. Bond yields soared following announcements of up to £200 bn of extra spending and unfunded tax cuts. This was having a knock on effect in the real world. Mortgage lenders have all but shut their doors to new borrowers, pension funds are nursing big losses and facing margin calls. The adults in the room , the Bank of England, was right to intervene, become the Gilt buyer of last resort and stablise the market. We are in crisis territory right now, and emergency action has to be taken. We hope that the Government will backtrack but fear it won't. Truss and Kwarteng are in hiding. The Bank of England however is now between a rock and hard place . They are being forced into QE when they want QT. Lower UK bond yields will mean money will flow to the US which has higher yields and this will mean further pressure for Sterling. The battle against inflation just got tougher again.
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Daniel Wiltshire
Actuary & IFA at Wiltshire Wealth
In order to prop up gilts - and the pension funds that invest in them - the Bank has been forced into more QE. Arguably the reason we're in this mess in the first place. So we're now in a situation where the Bank is tightening at the short end of the yield curve, whilst continuing to loosen at the long end. Get it? Me neither - the whole thing's a car crash.
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Adrian Kidd
Chartered Wealth Manager at EQ Financial Planning
The UK has gone crazy. The Bank of England and Government are acting independently and for themselves. It's disjointed. in the extreme. On the international stage, the UK is now a total joke. The government needs to backtrack, however m much pride they have to swallow. If not, I fear for the UK economy.
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Dominik Lipnicki
Director at Your Mortgage Decisions Ltd
This was the right course of action, but it does however show a level of desperation to stabilise the markets. The fact that the Pound sank after the decision underlines that. The Bank of England have also stated that this will be funded from reserves and not from printing new money. The government will find it hard to U-turn but the pressure on them to do so is growing by the day.
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Graham Cox
Director at Bridging Hub
Goodbye quantitive tightening. Welcome back quantitive easing. If it wasn't so serious, it would be laughable how quickly the Bank of England has had to do a 180 degree turn. More kicking the can down the road. The economic circumstances look increasingly dire with each passing day. The credibility of Kwarteng and Truss has been shattered. We need a General Election now because this Government is a sinking ship and will take millions down with it.
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David Robinson
Co-Founder at Wildcat Law
The Bank of England is now in very dangerous waters. It is effectively back in the business of printing money, a policy that is inflationary. It has been forced to do this to stabilise Gilt rates but this in itself is a dangerous gamble. It may drive Sterling down even further and increase the need for very sharp and painful interest rate rises. Central banks buying government debt worked whilst everyone was doing it, but if the other major economies are pursuing a different course we could see some very negative consequences. The Government needs to get a grip quickly and be seen to be getting a grip. This will most certainly involve some very unpopular cost cutting decisions, which is something a government elected on a populist majority will always struggle to do. Markets hate uncertainty and we are seeing the consequences of that now.
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Marcus Wright
Managing Director at Bolton Business Finance
The Bank of England buying gilts is an admission of the mayhem happening in the markets this week. The pound has actually dropped after the announcement, however over time it should help stabilise the gilt market, which is good for the UK. The problem is this is the complete opposite of the quantitative tightening they were supposed to be doing to try and combat inflation. Unfortunately, the Bank of England are being pulled in all directions, from the government, inflation and financial market volatility. This may not end well at all.
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Joshua Gerstler
Chartered Financial Planner at The Orchard Practice
"The intention is to send a signal to the world that the UK is on top of everything, but I think the message that will be received is that the UK is worried about everything. Hopefully this response has the desired effect but I am concerned that there could be a lot of pain coming for a lot of people."