Yahoo Finance Pound fluctuates as Bank of England confirms it will not extend bond-buying plan
The pound (GBPUSD=X) had a rollercoaster ride on Wednesday after the Bank of England (BoE) denied that it will extend its emergency bond-buying programme.
On Tuesday night, governor Andrew Bailey said support for troubled pension funds will end as scheduled on 14 October, causing the currency to fall.
He told pension funds that they “have three days left” before the support ends, despite calls for more time in order to avoid a repeat of the forced selling that prompted Threadneedle Street to launch the scheme in the first place.
“Part of the essence, I think, of a financial stability intervention is that it is clearly temporary,” he said at an Institute of International Finance event in Washington.
The bank was forced to announce the £65bn programme to buy government bonds in order to help pension schemes after chancellor Kwasi Kwarteng’s mini-budget caused a record sell-off in gilts.
However, a report in the Financial Times said that the UK central bank had signalled to some lenders that it was willing to extend the scheme if needed.
“They told us that they were watching the LDI managers closely to see whether they had managed to generate enough liquidity for their clients to cope with margin calls and would decide whether to extend the facility on Thursday or Friday,” a banker told the newspaper.
Sterling initially rose on the back of the report, while longer-dated government bond yields also rose, increasing government borrowing costs.
A Bank of England spokesperson said:
"As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October. “As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October.— Bank of England Press Office (@BoE_PressOffice) October 12, 2022
But on Wednesday, a Bank of England spokesperson said that the programme will in fact end on Friday as planned.
The pound fell back to trade at around $1.097, wiping out the gains it had made, before climbing again slightly to $1.10 as the FTSE 100 (^FTSE) closed.
“Main market participants expected the Bank simply to extend its facility,” former Bank of England deputy governor Sir Charlie Bean said.
Read more: Bank of England intervenes again amid 'material risk' to UK financial stability
He told BBC’s Today Programme: “If you say you’re going to keep on extending the facility, you take the pressure off the pension funds to do what’s needed, you also take the pressure off the government to do what’s needed and get the fiscal position in order. We shouldn’t forget that this is the prime cause of it [the market turmoil].”
Meanwhile, the Pensions and Lifetime Savings Association said: “A key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond.”
It comes as the UK is already teetering on the brink of recession after new data showed that the economy contracted 0.3% in August.
Read more: Bank of England: What will the emergency action actually do?
“The ongoing squeeze on household finances continues to weigh on growth, and likely to have caused the UK economy to enter a technical recession from the third quarter of this year,” Yael Selfin, chief economist at KPMG, said.
“The prospect of the Bank of England raising base interest rates higher and worries about a shaky housing market could see GDP falling by as much as 1.6% in 2023.”
