Bank of England widens gilt purchase operations in response to ongoing market volatility

The Bank of England has announced it increase its interventions in gilt markets with further purchases of long-dated government bonds.

Following a September 28th announcement that the Bank would make temporary and targeted purchases of gilts, the Bank of England has announced it will expand purchases to include index-linked gilts in a further bid to restore stability to financial markets.

The expansion of operations will be in effect from 11th to 14th October and run alongside existing daily gilt purchase auctions, which are also due to end on 14th October. The Bank is prepared to purchase up to £10 billion of gilts each day, of which up to £5 billion will be allocated to long-dated conventional gilts and up to £5 billion to index-linked gilts.

As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury. The Bank has also consulted with the Debt Management Office.

Typically secure UK government bond have undergone significant repricing in recent weeks in response to the falling value of sterling and market responses to the government’s economic plans. While initial interventions by the UK’s central bank had stabilised bond values, further repricing of government debt resumed, particularly affecting index-linked gilts.

Dysfunction in the market, the Bank warns, could trigger a ‘fire sale dynamic’ that reinforces further economic and financial instability. The Bank of England warns that failure to intervene in the gilt market could lead to greater financial instability affecting the wider economy by limiting credit availability for UK consumers, given the role government bonds play in ensuring liquidity for major lenders and pension funds.