The Bank of England announced on Wednesday that it will intervene in the debt market and buy government bonds to “restore normal market conditions” at a time when UK interest rates are rising.
“The bank will buy long-term government bonds from today,” the Bank of England said in a statement, specifying that the “operation will be fully funded by the Treasury”.
In response, the interest rate on the 30-year debt, which had reached its all-time high of 1998 at the start of the session, fell 5.14% to 4.73%.
In turn, the pound lost 1.5% against the dollar after the central bank intervened in the bond market.
The Bank of England’s intervention was justified by “real risks to UK financial stability” after the new UK government announced expensive fiscal measures last Friday, including measures to support the economy and a tax cut, which have disrupted markets.
The pound fell to an all-time low of $1,0350 on Monday and has been unable to recover since.
Interest rates on government debt rose, but demand fell.
“Market movement has increased since Tuesday, mainly affecting long-term debt. If this market dysfunction continues or worsens, it poses a real risk to the UK’s financial stability,” the Bank of England said.
Yields on 30-year bonds, which stood at 3.5% early last week, have risen. Ten-year bonds, which had risen to 4.59%, the highest level since 2008, have now fallen to 4.23%.
Finance Minister Kwasi Kwarteng, for his part, “authorized the governor’s request to fund the operation, keeping financial conditions affordable for families and businesses,” the Treasury said in a separate statement.
Shortly before that, the Treasury had defended the budget plan released last week, despite criticism from the International Monetary Fund (IMF), the Moody’s rating agency and the political class.
The tax cut joins a package announced in recent weeks to freeze energy prices for households and businesses, which is expected to cost £60bn (€68,700m) over the next six months.
“We have acted quickly this winter and next winter to protect households and businesses, following unprecedented energy price increases” following the war in Ukraine, the Treasury argued, explaining that a medium-term budget plan will be released on November 23. are being presented.
News updated at 13:22
Source: DN
