Key points from the Bank of England announcement:
·
To prevent an ‘unwarranted tightening
of financing conditions and a reduction of the flow of credit to the real
economy’ the BoE will temporarily purchase gilts on ‘whatever scale is
necessary’.
·
Auctions will begin today and last
until 14 October. They are intended to tackle a ‘specific’ problem in the
long-dated gilt market. UK pension funds have apparently come under pressure to
sell bonds. The purchases will be unwound once market conditions normalise.
·
Although the BoE’s £80bn annual
target for the reduction of its balance sheet is unchanged, it has postponed
the first sales – initially planned for next week - until 31 October.
The Bank of
England’s move has bought the government time to fix its credibility, says
Kallum Pickering, senior economist at Berenberg, following the chancellor’s
package of £45bn of unfunded tax cuts that primarily benefit the wealthy.
Gilt yields
may be volatile in coming days as the BoE wrestles with market forces to stem
selling pressure. But the BoE is the ultimate backer of sterling-denominated
paper. Betting against its ability to fix the market disorder – at least in the
short term – is futile, in our view.
But to make
the situation sustainable, the government needs to fix its own problems. On 23
November Chancellor Kwasi Kwarteng will unveil more of his fiscal plans. He
should recognise that the recent disorder reflects perceptions about his and
his government’s credibility and take decisive steps to shore up confidence.
Short of
reversing or delaying some of his tax plans, his main task will be to come up
with sensible spending plans which – when factored into the OBR’s model
alongside the tax cuts in the Growth Plan – show that borrowing and debt will
not balloon under his watch. At that point, markets may be ready to pay more
attention to the positive elements of Trussonomics such as supply-side reform
and pro-growth tax adjustments.
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