Bank of England intervenes in bond markets after selloff

The BOE said it will halt the start of its gilt selling next week and will carry out temporary purchases of long-dated governments bonds from Wednesday in order to restore orderly market conditions. "The purchases will be carried out on whatever scale is necessary to effect this outcome," it said in a statement.

"As the Governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.

"This repricing has become more significant in the past day - and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy."

The Bank added that it "stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses".

It also said that the Monetary Policy Committee will not hesitate to change interest rates by as much as needed to return inflation to its 2% target.

The announcement from the BoE caused an immediate drop in long-dated UK gilt yields, with the 10- and 30-year bond yields falling by around 0.4%. Sterling, however, slid further and by 1220 BST was trading down 1.4% against the dollar at 1.0580.

The selloff in UK government bonds began last week after chancellor Kwasi Kwarteng announced a swathe of tax cuts in his so-called mini-budget. The fiscal package announced includes around £45bn in tax cuts and £60bn in energy support to households and businesses and will be funded through borrowing.

The International Monetary Fund has urged the UK to reverse the tax cuts, warning that the measures will add to inflation and increase inequality. Meanwhile, Moody's has cautioned that the mini-budget risks "permanently weakening the UK's debt affordability", suggesting that a credit rating downgrade could be on the cards.

Walid Koudmani, chief market analyst at XTB, said: "This is a significant step by the Bank of England. The UK central bank first tried words, which failed. Now it tries to intervene in bond markets to bring yields back under control. On the one hand, this might bring some reassurance to the market that the BoE is ready to act outside of its scheduled meetings. This means it's now much more likely we will see major interest rate hikes before the next MPC meeting in November.

"Yet on the other hand, the Bank of England is applying plasters on the financial wounds created by the Truss government who have shown no hint at reversing policy. So until that happens, the question remains how much further will the BoE be forced to intervene and over what time period? Time will tell."

Paul Dales, chief UK economist at Capital Economics, said that despite the latest move from the BoE, the overall sense is that the downside risks to the UK economy are growing.

"Less than a week ago the Bank said there was 'a high bar for amending the planned reduction in the stock of purchased gilts'. We now know what that bar was - a mini-budget that resulted in 30-year gilt yields rising from 3.60% to 5.10%, which threatened financial stability by forcing pension funds to sell assets into a falling market in order to meet cash collateral requirements," he said.

Dales said the announcement shows the Bank is going to do all it can to prevent a financial crisis "and it is already working", with 30-year gilt yields falling back from 5.10% to 4.30%, reversing about half of the rise in recent days.

"While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position," he said. "It wouldn’t be a huge surprise if another problem in the financial markets popped up before long. Either way, the downside risks to economic growth are growing. And the Chancellor’s 2.5% real GDP growth target is looking even more unachievable."

The BOE said its first auction will be conducted on Wednesday between 1500 and 1530 BST, when it will buy up to £5bn of conventional gilts with a residual maturity over 20 years. Subsequent auctions will be held on each week day from 28 September to 14 October, between 1415 and 1445 BST.

The auction schedule will be kept under review, and details of each auction will be confirmed on the Bank's wire services pages.