The sell-off of British government bonds accelerated on Wednesday, driving up long-term borrowing costs after the Bank of England reiterated plans to halt an emergency gold purchase plan as scheduled on Friday.
The central bank said on Wednesday morning that it “has made it clear from the outset that its temporary and targeted purchases of gold bonds will end on October 14.”
The Bank of England added that it had “made very clear in liaison with banks at senior levels” that it would end its scheme this week. The Financial Times reported earlier on Wednesday that Bank of England officials have told lenders they are ready to extend the program beyond Friday’s deadline if market volatility flares up again.
The UK 30-year yield rose 0.2 percentage point to 5 per cent, as the pace of selling accelerated after the Bank of England announcement. Long-term yields are now approaching the levels that prompted the central bank to begin its initial intervention in the gold market on September 28. Bond yields rise as their prices fall.
The latest sell-off comes after Bank of England Governor Andrew Bailey warned pension funds late Tuesday that they have “three days left” before the support ends.
“The lack of certainty creates real challenges [for trustees]said Andrew Coles, CEO of pension advisory firm Isio. “On the one hand, we have an official line which is the deadline on Friday, and then stories leak through that if the markets react, we might get involved. That doesn’t give certainty to trustees and planners trying to prepare.”
Chief Economist Howe Bell followed up on Bailey’s message on Wednesday by insisting that the Bank of England must remain focused on its main objective of fighting inflation.
Has monetary policy been reoriented towards serving financial stability? . . In a speech in Scotland, Bell said he would also be distracted from his central task of maintaining price stability and returning inflation to the 2 per cent target. He indicated that the Bank of England is likely to raise interest rates significantly next month in response to the tax cut package that Chancellor Kwasi Quarting introduced in September.
The pound stabilized on Wednesday, having fallen sharply after Bailey spoke in Washington on Tuesday night. The pound rose 0.8 percent against the dollar at $1.105 in morning trading in London.
The Bank of England was scrambling to contain the fallout from Quarting’s tax cut package, which plunged the British pound and the gold market, leading to a liquidity crisis among pension funds.
The central bank implemented two more emergency interventions earlier this week, increasing the maximum volume of its purchases and expanding it to include inflation-linked bonds. With three days of buying left before Friday, the central bank bought 8.8 billion pounds of bonds, well below the potential size of the 65 billion pounds programme.
“It seems like everyone is building the boat while it’s sailing,” said Richard McGuire, a fixed income analyst at Rabobank.
He added that the lack of clarity about the BoE’s intentions has exacerbated the information vacuum on how the government plans to borrow on a sustainable basis.
McGuire said: “All this uncertainty and turns are bad from a market perspective. The Bank of England is desperately trying to hide the symptoms of the problem because it can’t address the root cause: the credibility problem after the government’s ‘mini’ budget.”
Kwarteng will publish a medium-term plan on how to reduce debt on October 31, but Prime Minister Liz Truss said in Parliament on Wednesday that the government would not cut spending – leaving open the question of how it plans to fund the £43 billion tax cuts. .
“What we’re going to make sure of is that debt goes down over the medium term,” Truss said. “But we’re not going to do that by cutting public spending but by making sure that we’re spending public money well.”
Speaking to the BBC, Jacob Rees-Mogg, Britain’s business minister, suggested that the blame for the market turmoil rests with the Bank of England, not the government.
“What has caused the impact on pension funds, because of some high-risk but low-probability investment strategies, is not necessarily the micro-budget,” the minister said. “It could be the fact that the day before the Bank of England did not raise interest rates as much as the Federal Reserve.”
The Bank of England raised interest rates by 0.5 per cent to 2.25 per cent on September 22, a day after the Federal Reserve implemented a third consecutive increase of 0.75 per cent in the US.
Additional reporting by Josephine Combo
Originally published at San Jose News Bulletin
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