Bank of England Explands Bond-Buying Program to Include Inflation-Linked Bonds

The Bank of England (BoE) on Tuesday ramped up its intervention in the gilt market by including index-linked gilts in its emergency purchasing programme, citing market dysfunction which it says poses a “material risk” to the UK’s financial stability.

Deputy Prime Minister Therese Coffey said she’s “absolutely confident” pensions are safe despite the central bank’s warning, saying the short briefing message she got from the Treasury is that “it’s a technical financial stability.”

Downing Street said Prime Minister Liz Truss is “committed” to the government’s plan to stimulate growth.

The BoE’s temporary programme to buy government bonds, known as gilts, was introduced on Sept. 28 after a plummet in bond value following the government’s mini-budget announcement, which threatened to collapse pension funds and send gilt prices on a further spiral.

The bank on Monday doubled its daily purchasing limit from £5 billion ($5.5 billion) to £10 billion ($11 billion) to support “an orderly end” of the programme on Friday.

But the move, along with the government’s decision to publish its debt-reducing plan on an earlier date, has failed to calm the market.

“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” the BoE said in a statement.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” it added.

Instead of further raising the buying limit, the bank said it will use half of its daily limit to buy index-linked gilts and the other half on long-dated conventional gilt purchase operations.

The temporary bond-buying programme is fully indemnified by the Treasury.

The BoE also said it will temporarily pause its corporate bond purchase scheme sales operations.

Truss ‘Confident’ Economic Policy ‘Will Deliver Growth’

Speaking to “BBC Breakfast,” Coffey said she was “absolutely confident pensions are safe.”

“The Bank of England is independent and undertaking its role in trying to bring some stability, which it had done,” the deputy prime minister said.

“I’m not aware of the details of exactly what’s happened this morning. The short briefing message I’ve had from Treasury is that it’s a technical financial stability,” she added.

Asked about the BoE’s announcement, Truss’s official spokesman said the bank’s additional measures will “support an orderly end” to its intervention scheme.

“It’s in line with its financial stability objective and we are in regular contact with the bank, which will closely monitor markets in the coming days,” he said.

The official emphasised the bank’s independence when asked if the bond-buying scheme will end by the Oct. 14 deadline.

He said the bank’s fresh emergency action was not discussed at Tuesday morning’s main Cabinet meeting.

“They talked about the growth plan and the importance of that,” the spokesman said.

He said Truss is “committed to the growth measures” set out on Sept. 23 by Chancellor of the Exchequer Kwasi Kwarteng.

“The prime minister remains confident that the measures set out will deliver growth in the economy,” he said.

PA Media contributed to this report.