The Bank of England will expand its gilt-purchasing plan and the Treasury has confirmed the date of its economic forecast, in an attempt to quell the volatility in markets after the chancellor’s “mini” Budget.
The central bank said this morning (October 10) it will increase the size of its remaining bond purchases, which were introduced after the “mini” Budget prompted turmoil in bond markets and emergency intervention by the BoE.
The "mini" Budget introduced a number of unfunded tax cuts, including abolishing the 45p higher income tax rate, which has since been reversed, and getting rid of the health and social care levy and cutting the basic tax rate by 1p in the pound.
The Office for Budget Responsibility did not release an economic forecast alongside the Budget, after chancellor Kwasi Kwarteng did not instruct the body, which had previously said it was ready to provide an emergency forecast.
UK treasury bonds slumped after the statement, with yields hitting all-time highs and the value of the pound crashing to near-parity with the dollar.
Pension funds were forced to sell liquid assets, including gilts, to meet margin calls for liability-driven investments, a derivative hedge against rising interest rates, which caused yields to rise further, increasing the margin calls and raising concerns the sector was beginning a doom spiral.
This eventually prompted the BoE to pause a planned sale of gilts.
The BoE’s deputy governor for financial stability, Sir Jon Cunliffe, has since said that some DB pension fund investments in pooled LDI investment funds would have been worthless without the central bank’s intervention.
In an attempt to ensure the stability of this market once the bank’s intervention finishes this Friday (October 14), the BoE has also launched a temporary expanded collateral repo facility (TECRF), which will enable banks to help ease the liquidity pressures of their LDI clients through liquidity insurance operations.
In the statement, the bank said: “Beyond the end of this week’s operations, the Bank will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future."
The Treasury confirmed this morning that the OBR has been instructed to release a medium-term fiscal plan on October 31.
Chair of the Treasury Committee, Mel Stride, warned the previous chancellor Nadhim Zahawi against releasing an emergency budget without an accompanying economic forecast, saying it amounted to "flying blind".
sally.hickey@ft.com
