Pound Freefall Prompts BoE Emergency Bond-Buying

The Bank of England, the UK’s Central Bank, has announced this week a temporary gilt-buying programme to urgently respond to a “material risk to UK financial stability”. This comes as gilt yields were on course for record highs as investors exited UK’s bonds after the government announced underfunded tax cuts and increased spending even as other countries continue tightening their monetary policy. The pound fell to a 37-year low on Monday, hitting 1.04 against the dollar. 

The BoE said in a statement: “This repricing has become more significant in the past day — and it is particularly affecting long-dated UK government debt.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability…”

While no number has been announced by the central bank, it initially plans to hold daily auctions to buy up to 5 billion pounds of gilts with a maturity of at least 20 years, between now and 14 October. 

Post-Market

Markets found a measure of calm at the BoE’s announcement, with US stocks ending 6 straight days of losses. The Dow rose 1.9%, exiting bear market territory; while the S&P 500 and Nasdaq both climbed 1.97%. 

Predictable, the pound rebounded, gaining 1.42%, while the euro gained 1.45% for the day. The dollar, in response, declined sharply in the risk-off environment – although with a foreseeably capped downside as the reality of further Fed policy tightening remains. 

US bond yields were also pushed down, with the 10-year note pulling from above 4% to 3.7%.

Even with a focus on government spending to boost economic growth, the BoE cannot ignore rampaging inflation, with the central bank stating that it “will not hesitate” to hike rates to control inflation, which read 9.9% in August. The BoE’s rates are now at 2.25% after September’s more-dovish-than-expected 0.5% hike. 

Pound traders are now advised to look out for the UK’s GDP figures, which will be released at 09:00 (GMT+3) on Friday, 30 September. For clues on the wider markets, US quarter-on-quarter GDP figures will be released later today at 15:30 (GMT+3).

As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.