The Bank of England announced it would further expand its emergency bond-buying program as it warned that an ongoing sovereign debt market crisis posed a risk to the UK’s financial stability.
Traders have continued to sell government bonds this week, pushing up credit prices and posing a “material risk to UK financial stability”, according to the central bank.
The bank said Tuesday morning it would now expand the scope of its bond-buying plan to include purchases of index-linked gilts to prevent a “fire sale” that could threaten pension funds.
“Earlier this week saw another significant repricing of UK government bonds, particularly index-linked gilts,” it said. “A dysfunction in this market and the prospect of self-reinforcing ‘fire sale’ momentum pose a significant risk to UK financial stability.”
The Pensions and Lifetime Savings Association (PLSA) said a “key concern” for pension funds is that the bond-buying program should not end too soon.
The PLSA – which represents pension schemes that provide retirement income to more than 30 million savers – suggested emergency measures should continue until at least the end of October.
The industry association said “many believe it should be extended until the next fiscal event on October 31 and possibly beyond, or when the purchase is terminated that additional measures should be taken to manage market volatility.”
Sir John Gieve, former deputy governor for financial stability at the Bank of England, said the bank could be forced to continue its bond-buying program “a few weeks” beyond Friday.
“That [bond market] Yesterday’s movements must have alarmed them,” Sir John told BBC Radio 4 today program – who said the “underlying move was due to the announcement of huge additional loans” by Chancellor Kwasi Kwarteng.
Sir John said the Chancellor was still under pressure to reassure markets when he unveiled his financial plan on October 31.
“He now has to actually make a number of forecasts that work out. Well, it’s one thing to say, can he actually deliver? Does the faction believe in it? All the difficult decisions have yet to be made.”
It comes as the Institute of Fiscal Studies (IFS) warned the government would need to make £60bn in spending cuts to balance the books by 2026-27.
If Liz Truss and her chancellor don’t give up their tax cut giveaways, they will have to make “painful” public sector cuts of 15 percent to get debt under control, the IFS found.
The bank was forced to launch its emergency bond-buying program on September 28 after market turmoil threatened pension funds. Asked if pensions are safe, Deputy Prime Minister Therese Coffey told Sky News: “I have absolutely no doubt that pensions are safe.”
Ms Coffey on Tuesday insisted the UK’s public finances were still in “good shape”. Asked about the prospect of austerity measures ahead, the deputy prime minister said: “I’m just not going to go into hypotheses.”
Shadow Treasury Secretary Pat McFadden said the news that the Bank of England “has been forced to intervene to calm markets for the second year in a row shows the government’s approach is not working”.
The Bank of England announced on Monday that it would increase the daily limit on its government bond-buying program by £5 billion.
Long-dated gilt prices fell, sending 30-year bond yields soaring to 4.7 percent on Monday – the highest since the Bank of England’s mini-budget measures last month.
The bank said its recent efforts to expand the program would “act as a further prop to restore orderly market conditions”.
Senior Tory MP Mel Stride, chairman of the Treasury’s selection committee, warned Mr Kwarteng may need to go further if he is to calm jittery markets.
Mr Stride told the BBC: “And that is possible, but it may require a tremendous amount of political courage on his part, possibly even to backtrack further on announced tax cuts.”
Tory MPs have said so pleasemynews They would oppose major public sector spending cuts after the IFS warned against a return to austerity to tackle the black hole in public finances.