The Bank of England has announced its plans for new measures in an attempt to bring its emergency bond-buying scheme to an “orderly end“. The scheme was first introduced to prevent the collapse of some pension funds.
The scheme ends on Friday 14th October and will be drawn to a close with a final increase in the number of bonds the bank can buy. It will also introduce extra support to ease future strains on pension funds.
The bond-buying scheme was initially introduced as a result of the government’s mini-budget, which sparked turmoil in the financial markets. The Bank of England decided to step in to help ease the fallout.
With the deadline fast approaching, there are still some concerns among experts, however.
These mainly focus on the potential of volatility returning once the scheme ends. Pension Fund managers in particular, suspect the BoE will need to do more.
Stability Fears Continue To Grow
On the 23rd of September, the government’s mini-budget was announced, pledging £45bn in tax cuts in an attempt to boost economic growth. However, the level of borrowing by the government required investors, who understandably questioned the sustainability of the public finances.
As a result, the value of the pound plummeted to a record low as investors demanded a much higher return for investing in government bonds. This caused some to drop sharply in value.
Certain types of funds – for example, those in the pension industry, which invest in bonds – were forced to start selling.
The Bank originally guaranteed to buy up to £65bn bonds with a limit of £5bn a day. However, so far, the Bank has only bought up to £10bn in total.
In its latest announcement, it said it was ready to increase the size of its daily purchase, doubling its limit to £10bn per day for the final week of the scheme.
The Bank has made these promises over growing concern “over a material risk to UK financial stability“. They are now trying to ensure that all is in place to make the withdrawal of support as easy and smooth as possible.
With so much market turmoil, and ministers admitting “some market turbulence…” the calls for a policy u-turn on the mini-budget have been growing.
Some spectators even suspect that a policy reversal is already priced in – meaning that if the UK government stick to the current plans, a new round of sell-offs would begin.
GBP/USD has already seen huge volatility as participants try to judge what the BoE and Uk Government might announce next.