The Bank of England announced on Monday that it would provide extra support to UK markets and strengthen its efforts to ensure financial stability following the government’s plan to cut taxes while boosting borrowing incited panic.
The central bank said it was ready to buy up to £10 billion ($11 billion) of government bonds each day this week, double the daily limit it set when it announced its emergency intervention on September 28.
It confirmed the bond-buying program would end on Friday, but said it would extend extra support “beyond the end of this week” to banks still reeling from the fallout from a meltdown in some pension funds. The central bank said it would accept a wider range of assets as collateral in exchange for cash.
The move sends another signal to investors that the central bank is prepared to do whatever it takes to restore more normal trading conditions in the bond market, which is needed to keep borrowing costs down for UK households and businesses.
Long-term government bond yields, which move against rates, fell sharply after the Bank of England published its initial action at the end of September.
The central bank have said it was forced to act to prevent a “self-reinforcing spiral” after the market saw historic sell-offs in the wake of the budget plans unveiled by Finance Minister Kwasi Kwarteng and Prime Minister Liz Truss.
But interest rates on longer bonds have been pushed up again in recent days. Pension funds – which have been particularly exposed to the turmoil – have been forced to sell what assets they can to replenish depleted cash reserves.
Yields on those bonds rose again in early trading Monday and remain higher than they were before Kwarteng’s tax cut speech on Sept. 23.
The Bank of England said stressed funds have made “significant progress” over the past week, but that it will continue to work with them to ensure “the industry operates on a more resilient basis going forward.”
There is a particular focus on pension funds using liability-driven investment or LDI strategies, as this approach typically involves significant use of derivatives, which can make it more difficult to withstand a bond market shock.
To date, the Bank of England has saved just £5bn of debt when it could have bought £40bn, it said on Monday.