The Bank continues to monitor developments in financial markets very closely in light of the significant asset repricing of recent weeks. It has also been working with the UK authorities to address risks to the resilience of Liability Driven Investment (LDI) funds arising from volatility in the long-dated government bond (gilt) market.
On 28 September, the Bank announced that, in line with its financial stability objective, it would make temporary and targeted purchases of gilts to help restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
As previously announced, the Bank plans to end these operations and cease all gilt purchases on Friday 14 October.
On 10 October, the Bank announced additional measures to support market functioning and an orderly end to its gilt purchase scheme. These included the launch of a Temporary Expanded Collateral Repo Facility (TECRF) through which banks would be able to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations, and the expansion of the scale of its remaining gilt purchase auctions.
The purpose of these operations is to enable LDI funds to address risks to their resilience from volatility in the long-dated gilt market. LDI funds have made substantial progress in doing so over the past week. However, the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.
Therefore the Bank is announcing today that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022 alongside the Bank’s existing daily conventional gilt purchase auctions.
These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity. 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.
As announced on 10 October, the Bank stands ready to purchase up to £10bn of gilts each day, of which up to £5bn will be allocated to long-dated conventional gilts and up to £5bn to index-linked gilts. The pricing of this additional operation will reflect its nature as a backstop and that this is not a monetary policy instrument. The total size of these auctions will be kept under review. All purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.
The Bank will temporarily pause its CBPS sales operations this week. Confirmation of these restarting will be included as part of the Bank’s regular operational announcements.
The Bank will publish a Market Notice confirming operational details of the Bank’s index-linked gilt purchases.
Notes to editors
- This decision has been taken by the Bank’s Executive.
- The Bank’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.
- The Monetary Policy Committee has been informed of these temporary and targeted financial stability operations. This is in line with the Concordat governing the MPC’s engagement with the Bank’s Executive regarding balance sheet operations.