Bank of England Bond-buying Question

The UK’s Bank of England is setting aside £65bn to buy corporate bonds, in a move seen as an attempt to prop up the country’s struggling markets. By purchasing these corporate bonds, it’s seeking to improve liquidity in the market for private companies and make it easier for them to raise funds. But was it all smoke and mirrors?

The Bank of England announced these measures as a way to try and restore faith in the current markets.

Stabilise Stormy Waters

The hope was that this move would stabilise the market following the mini-budget announced by Kwasi Kwarteng. The budget prompted further fears of the UK returning to a 2008-style financial crisis and recession.

Leveraged pension funds in particular faced a liquidity crunch when the UK Gilt market got jittery around the ability of the government to repay debts.

The Bank of England said that it would buy bonds and gilts, and had set aside £65bn in order to do so.

What Has Happened Since?

The markets were indeed reassured that the UK government could service it debts.

GBP bounced a little after historic lows against both the USD and EUR, and more importantly, a modicum of calm was restored to the Gilt markets.

…but…

The Bank of England have not actually been buying the bonds and gilts in the volumes they claimed they would. Put simply, they used soothing words to calm the markets, but have actually taken very little action.

This makes perfect sense, as they are not keen to pump money into a system that they themselves think is overheating – in terms of inflation – hence recent rate rises.

So the carefully worded rhetoric calmed the markets, but did not actually require a whole lot of QE. The program is due to expire on the 14th October. Just before the next rate meeting.

Whether markets remain calm when they notice the bank actually did nothing, who knows – but it certainly brought some time for the UK Government and the Bank of England to try and pull in the same direction regarding economic policy.