The Bank of England has unveiled further measures to ensure an “orderly end” to its emergency gilt-buying programme, which was launched after the mini-budget market turmoil left the UK on the brink of a financial crisis.
The Bank said it will double the daily limit on its gilt-buying programme to £10 billion as the scheme draws to a close ahead of Friday’s cut-off.
It said it has so far bought only around £5 billion of UK Government bonds under the £65 billion programme launched late last month, when it stepped in to avoid “widespread financial instability”.
The central bank was forced to intervene with emergency action when the mini-budget market chaos caused the pound to tumble and yields on gilts to soar, which left some pension funds across the industry close to collapse.
It laid bare the scale of the woes last week when it said the scheme helped the UK narrowly avoid a market meltdown caused by concerns over the Chancellor’s £45 billion unfunded tax cuts, which threatened to spill over from the pension industry throughout the wider financial sector.
The market turmoil had forced pension funds to sell UK Government bonds to head off worries over their solvency, but this was threatening to see them suffer severe losses and was creating a downward spiral in gilt prices as more were offloaded.
Investment banks made calls on so-called liability driven investment (LDI) funds, which in turn called on pension funds, which were forced into a fire sale of gilts, driving prices still lower and yields higher.
The Bank said its move to step in on September 28 was designed to allow LDI funds to address risks to their financial resilience – and raise needed collateral – by immediately sending gilt yields lower.
The Bank of England will 'launch a facility that will run beyond the end of this week, designed to allow banks to ease #liquidity pressures faced by liability-driven investment funds.'
After years of ultra-low #yields, the financial system can't handle rising interest rates. pic.twitter.com/uuKCotHuMj
— jeroen blokland (@jsblokland) October 10, 2022
It said on Monday these funds “have made substantial progress in doing so over the past week”.
But there have been fears there could be a return to pension fund woes when the scheme ends on October 14.
The Bank said it will take a number of extra measures ahead of Friday’s deadline for its bond-buying programme, including a scheme to allow banks to help ease liquidity pressures facing their client LDI funds through liquidity insurance operations, which will run after the end of this week.
Under these operations, the Bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index-linked gilts, and also a wider range of collateral than normally eligible, such as corporate bonds.
It said: “Beyond the end of this week’s operations, the Bank will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future.”