LONDON – IN Bank of England He will suspend the planned start of his gold sale next week and temporarily start buying long-term bonds in order to calm market chaos unleashed by the new government’s so-called “mini-budget”.
British Treasury yields were on track for their biggest monthly rise since at least 1957 as investors fled Britain’s fixed income markets after the new fiscal policy announcements. Great measures included Vast areas of unfunded tax cuts that sparked international criticism, Including from the International Monetary Fund.
In a statement on Wednesday, the central bank said it had been monitoring a “significant repricing” of British and global assets in recent days, which has particularly affected the UK’s long-term government debt.
“If the dysfunction in this market persists or worsens, there will be a material risk to the UK’s financial stability. This would lead to an unjustified tightening of financing conditions and reduce the flow of credit to the real economy,” the Bank of England said.
“In line with its financial stability objective, the Bank of England stands ready to restore market performance and reduce any risk of contagion to credit conditions for UK households and businesses.”
From Wednesday, the bank will start temporary purchases of long-term British government bonds in order to “restore orderly market conditions”, and said these operations would be carried out “on any scale necessary” to calm markets.
The Bank’s Financial Policy Committee acknowledged on Wednesday that the dysfunction in the gold market poses a material risk to the country’s financial stability, and chose to take immediate action.
The bank said the Monetary Policy Committee’s target of an annual reduction of 80 billion pounds ($85 billion) for its gold holdings remains unchanged, with the first gold sales – tentatively scheduled for Monday – starting on October 31.
A UK Treasury spokesman confirmed the operation had been “fully compensated” by the Treasury, and said Finance Minister Kwasi Quarting was “committed to the independence of the Bank of England”.
“The government will continue to work closely with the bank to support its financial stability and inflation targets,” the spokesman added.
The bank said it will publish a market notice outlining the program’s operational details “soon.”
‘Caught in the crossfire’
Antoine Buffett, chief interest rate strategist at ING, said the Bank of England may need to extend bond purchases beyond the initial two-week period if volatility in the gold market persists, and that an additional rate hike was not off the table.
Buffett told CNBC immediately after the announcement that the bank’s first priority right now should be to operate the gold market, noting that the worst outcome would be leaving the sovereign without access to the market and unable to secure financing.
“Obviously the gold market was caught in the crossfire between the Bank of England and the Treasury, and it wasn’t quite the case, but it appears that they were competing or working at cross purposes,” Buffett said.
“So you have a world where the economy is in recession, the Bank of England is trying to calm the economy with spikes, and on the other hand you have the Treasury trying to protect the economy from this recession and implement inflationary fiscal measures.”
He added that the Treasury’s statement of support was important, noting that the government would be careful to avoid the impression that the gold market was in “big problems” to have forced the Bank of England to take over the rescue of the economy.
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