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Bank of England intervenes again amid 'material risk' to UK financial stability

A person walks past the Bank of England in the City of London financial district in London, Britain, January 23, 2022. REUTERS/Henry Nicholls
The Bank of England has widened its bond market intervention in fresh attempt to calm markets. Photo: Henry Nicholls/Reuters (Henry Nicholls / reuters)

The Bank of England is expanding its emergency bond buying operation for the second time this week, in an effort to counter what it warned was “dysfunction” in the market following Kwasi Kwarteng’s mini-Budget.

The central bank is widening the scope of its daily programme in which it buys up UK government debt, to include purchases of index-linked government bonds.

An index-linked gilt is a government bond with the interest rate on it linked to inflation.

Announcing the move, the Bank said there has been a “further significant repricing of UK government debt, particularly index-linked gilts”, which could threaten the UK’s financial stability.

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Read more: Bank of England doubles bond-buying programme to £10bn a day

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, pose a material risk to UK financial stability,” the Bank warned.

It added that its latest efforts will “act as a further backstop to restore orderly market conditions”.

This £65bn bond-buying programme is due to end on Friday. Yesterday, the Bank doubled the size of its daily bond purchases, to a maximum of £10bn from £5bn.

But despite that move, UK borrowing costs hit the highest level since the turmoil immediately after the mini-budget.

The Bank of England's intervention comes after the sell-off in government bonds resumed on Monday as investor concerns failed to subside despite action by the Bank of England to double its daily bond-buying limit and Chancellor Kwasi Kwarteng’s move to bring forward his new fiscal plan and independent economic forecasts to October 31.

Read more: 'Painful’ cuts ahead amid £60bn hole in public finances, think tank warns

Long-dated gilt prices tumbled, which sent yields on 30-year bonds soaring to 4.7% on Monday – their highest level since the Bank of England was forced to step in last month to avoid a mini financial market crisis.

Watch: How does inflation affect interest rates?