The Bank of England (BoE) said on Tuesday that it will buy index-linked gilts, a type of United Kingdom (UK) government bond that tracks inflation, as “the beginning of this week has seen a further significant repricing of UK government debt.”
This enhancement to the central bank’s operations will be in effect from Oct. 11 until Oct. 14 alongside its existing daily conventional gilt purchase auctions, which were announced after the new UK government’s large-scale tax-cutting package sent financial markets into turmoil in September.
The BoE on Monday increased the limit on its daily bond purchases from 5 billion British pounds (5.55 billion U.S. dollars) to 10 billion pounds each day. According to the BoE’s Tuesday statement, up to 5 billion pounds will be allocated to long-dated conventional gilts and up to 5 billion pounds to index-linked gilts.
“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,” the BoE said.
Dysfunction in the debt market, and the prospect of self-reinforcing “fire sale” dynamics, pose a material risk to UK financial stability, it said.
Yields on government bonds continued to rise at the beginning of this week, fueling concerns in the markets. Inflation-linked gilts, which are heavily bought by pension funds to protect themselves against rising inflation, came under acute selling pressure on Monday.
The BoE hopes to avoid a crisis in the market by being a willing buyer of bonds from pension funds, which are under pressure, but the key sticking point is that the support measures are only scheduled to last until Friday, Russ Mould, investment director at the online investment platform AJ Bell, said.
A report published on Tuesday by the Institute for Fiscal Studies has concerned markets further. It said borrowing was expected to reach 103 billion pounds in 2026-2027, which would be 71 billion pounds higher than forecast in March.
Under Citi’s central forecast, it would require a fiscal tightening of 62 billion pounds in 2026-2027 to stabilize debt as a fraction of national income, so even reversing all of the permanent tax cuts in the September fiscal plan would not be enough. (1 pound = 1.11 U.S. dollars)