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Buying government bonds: “Risk to UK financial stability” – BoE to intervene

Purchase of government bonds
‘UK financial stability at risk’ – BoE steps in

The new British government’s budget is sending shock waves through the financial markets. The pound rushes down. The central bank is now fighting back. With temporary bond purchases, she wants nothing less than to restore orderly market conditions.

The Bank of England is bracing itself against the recent turbulence on the financial markets with temporary purchases of government bonds. From now on, the central bank will purchase government bonds with long maturities, she announced. “The purpose of these purchases will be to restore orderly market conditions.” The financial market turbulence was triggered by billions of euros in plans by the new British government for tax cuts and relief for consumers and companies.

Doubts about the financing of the projects had pushed the British currency to an all-time low of $1.0327. The currency watchdogs want to buy as many bonds as necessary by October 14 in order to stabilize the financial market. “Should the failure of this market persist or worsen, there would be a significant risk to UK financial stability,” they justified the move. Financing conditions would then tighten and the flow of credit to the economy would decrease.

Earlier, the yield on 30-year UK government bonds had shot up to more than 5 percent for the first time since 2002. After the central bank’s announcement, investors increasingly took hold of British government bonds. The yield on 30-year paper therefore fell by 0.2 percentage points at times. Yields on the particularly interest-sensitive UK two-year bond fell to 4.278 percent from 4.550 percent previously.

The Bank of England intends to sell back the government bonds it has bought as soon as the financial markets have calmed down again. In addition, the British Treasury has promised to protect the central bank from any losses, she explained. The central bank also plans to stick to its target of reducing its £838 billion bond holdings (gilts) by £80 billion next year. However, the start of sales for the title is to be postponed due to market conditions. The central bank actually wanted to start next week.

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