Bank of England warns of 'material risk to financial stability'

Bank bolsters its emergency bond-buying plan as market turmoil continues
Photo: James Mitchell/Flickr/CC BY-SA 2.0

By Alain Tolhurst

11 Oct 2022

Deputy prime minister Thérèse Coffey has insisted people’s pensions are safe despite the Bank of England warning this morning of a "material risk to UK financial stability”.

The bank has announced it will further bolster its emergency bond-buying plan in reaction to ongoing issues in the gilts market.

It said it will now widen the scope of its UK government bond-buying programme, which was launched in the wake of market turmoil sparked by the government’s mini-budget last month.

On Monday, the sell-off in government bonds – also known as gilts – resumed as investors failed to be reassured about the future of the UK economy after chancellor Kwasi Kwarteng announced he was moving his “medium-term fiscal plan” to the end of this month and had hired an experienced Treasury civil servant to be the department’s new permanent secretary.

The Bank of England also doubled its daily bond-buying limit, but despite the intervention, long-dated gilt prices tumbled, which sent yields on 30-year bonds soaring to 4.7% yesterday – their highest level since it was forced to step in last month to avoid a mini financial market crisis, and the pound also fell to $1.10.

The bank said: "The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts.

"Dysfunction in this market, and the prospect of self-reinforcing 'fire sale' dynamics pose a material risk to UK financial stability.”

But Coffey sought to reassure people that the intervention would not impact personal finances.

"I'm absolutely confident pensions are safe, the Bank of England is independent and undertaking its role in trying to bring some stability, which it had done," she told BBC Breakfast

"I'm not aware of the details of exactly what's happened this morning. The short briefing message I've had from Treasury is that it's a technical financial stability."

Last week the bank revealed the emergency action it took on September 28 helped the UK narrowly avoid a market meltdown caused by concerns over the chancellor's tax-cut plans.

But as gilt yields started to surge once more yesterday due to ongoing fears over the government's economic policies, it ramped up its emergency action to avoid a cliff-edge when its initial bond-buying programme draws to a close on Friday.

It added: "The bank continues to monitor developments in financial markets very closely in light of the significant asset repricing of recent weeks.

"It has also been working with the UK authorities to address risks to the resilience of liability driven investment (LDI) funds arising from volatility in the long-dated government bond (gilt) market."

Kwarteng has been told by a leading economic think tank he will have to find spending cuts of more than £60bn if he is to meet his target to get the public finances back under control.

The Institute for Fiscal Studies said it was not possible to deliver cuts on that scale through efficiency savings and "trimming the fat”, and that it would require major cuts to public services.

Even if growth were to pick up by 0.25% a year, the chancellor would still have to find savings of £40bn, with IFS director Paul Johnson saying that after 12 years of austerity, cuts on that scale were "extraordinarily hard to achieve".

But Coffey has insisted the UK's public finances are in a "good state”, and denied that Kwarteng brought his next fiscal statement forward from 23 November to 31 October because the markets were spooked.

"I think he decided we're in a good state and we'll continue to discuss this across government and with Parliament over the few weeks ahead,” she told Sky News.

Labour’s shadow chief secretary to the Treasury, Pat McFadden, said: "That the Bank of England has been forced to step in for a second day running to reassure markets shows the government's approach is not working, and creates renewed pressure for the chancellor to reverse his budget.”

He added: "This is a Tory crisis made in Downing Street, being paid for by working people.

"They have lost all credibility and control and they must respect our nation's independent institutions, go back to the drawing board and reverse this damaging Budget."

Alain Tolhurst is chief reporter for CSW's sister title PoliticsHome, where this story first appeared

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