Bank of England steps in again to calm UK markets

New liquidity scheme announced as bank says it could increase bond purchases

The Bank of England in London's financial district. It said it had spent £5 billion ($5.5bn) stabilising markets since investors took fright at a controversial mini-budget. Reuters

The Bank of England stepped in once again on Monday to calm UK markets and shore up pension funds from the economic turmoil in Britain.

Banks will be able to draw on a temporary facility to ease pressures facing their pension fund clients.

They can obtain the extra funds by putting up collateral that the Bank of England would not normally accept.

The bank also announced it could increase its emergency buying of government bonds before a Friday deadline.

It said it had spent £5 billion ($5.5bn) stabilising markets since investors took fright at a mini-budget by Chancellor of the Exchequer Kwasi Kwarteng.

Mr Kwarteng separately announced he would bring forward a planned economic forecast to October 31, bowing to pressure from MPs.

Borrowing costs rose and the pound crashed on currency exchanges after Mr Kwarteng announced a string of debt-fuelled tax cuts on September 23.

The bank’s deputy governor, Sir Jon Cunliffe, said in a letter to MPs last week that the market chaos pushed pension funds to the brink of collapse.

Amid a sell-off of government bonds, “it was likely that these funds would have to begin the process of winding up the following morning,” he said.

The Bank of England stepped in and said it was willing to spend up to £65bn to buy long-term bonds. However, it has spent only £5bn so far.

It said on Monday it was “ready to increase the size of its daily auctions” to use up more of the unused funding before the scheme ends on Friday.

The new liquidity scheme, the Temporary Expanded Collateral Repo Facility, will run for a month until November 10.

“This facility will enable banks to help to ease liquidity pressures facing their client LDI [liability-driven investment] funds through liquidity insurance operations,” a statement said.

The latest announcements are intended to bring an “orderly end” to the bank’s bond purchases, it said.

Mr Kwarteng said the October 31 forecast would be published alongside a medium-term fiscal plan, explaining how the government will pay for its tax cuts.

He wrote in a letter to the chair of the Treasury Select Committee that an initial analysis made available last month was not suitable for publication because it did not consider the impact of his policies.

“I would definitely encourage him [Mr Kwarteng] to publish it as soon as he can. I think the sooner the better, as far as the markets are concerned,” one of his predecessors, Sajid Javid, told BBC Radio 4’s Today programme.

One of the most politically explosive measures in the mini-budget, the abolition of a 45 per cent tax rate for top earners, was scrapped after an outcry.

Another unresolved question is whether benefits will be cut in real terms in order to fund the expensive tax cuts.

Mr Javid, a backer of Prime Minister Liz Truss during the recent Conservative Party leadership campaign, said he hoped benefits would rise with inflation during “incredibly challenging times”.