The Bank of England has completely scaled back the bond-buying program it initiated when Liz Truss was Prime Minister, ending the emergency measures needed to stabilize the UK economy after its disastrous ‘mini’ budget.
The BoE laid to bed the final elements of the Trussonomics crisis response on Thursday, announcing it had sold £19.3bn worth of government bonds back to “interested buyers” in a “timely but orderly liquidation of this portfolio”. .
It said in a statement that it sold the bonds at a pace that did not trigger renewed dysfunction in key government bond markets.
Shortly after the September 23 “mini” budget, the UK government lost confidence in the international currency and bond markets. This has led to a huge increase in government borrowing costs, a fall in sterling to its weakest level ever against the US dollar and a crisis in parts of the pension system.
Defined benefit annuity providers were forced to sell the long-dated government bonds they owned to meet sudden calls for cash as their value fell and sent the market into a tailspin.
The BoE announced its intervention on September 28th. It pledged to create money temporarily, buying up to £65 billion worth of long-dated government bonds and index-linked bonds to give pension funds time to sort out their temporary funding woes.
In the end, the central bank didn’t have to use the full financial firepower it had on the table, in part because its commitment to intervene stabilized markets. Andrew Bailey, the bank’s governor, put his job on the line by warning pension funds they had limited time to repair the damage to their finances before the BoE ended its crisis measures.
Buying bonds was doubly difficult for the governor because the BoE was then selling government bonds – quantitative tightening – as part of a program to normalize its interventions in financial markets 14 years after the global financial crisis.
Simultaneously buying and selling bonds was difficult for the BoE to explain both to the public and internally where there were differences between monetary policy priorities and those of financial stability.
The bank’s actions helped solve the crisis in Britain’s pension system but did not save the careers of Truss or Kwasi Kwarteng, her Chancellor.
The BoE still plans to sell £80bn worth of government bonds it has bought under the back-to-back quantitative easing programs since 2009 by the end of the first quarter.
https://www.ft.com/content/b81a775c-61af-4585-9746-29f834aae017 Bank of England ends emergency measures sparked by Liz Truss