Bank of England to temporarily buy long-term bonds

• Central bank announces measures after the sharp drop in the pound and bonds.
• Long-term bond purchases will be made for an indefinite amount.

The Bank of England (BoE) announced operations in the UK government bond market (gilt). The BoE stated that in keeping with its goal of achieving financial stability, it was ready to restore operations and reduce contagion to household and corporate credit conditions.

The central bank will buy temporary purchases of long-term bonds starting on September 28. The BoE affirmed that the amounts of the purchases will be those necessary to achieve the desired effects. “The operation will be fully compensated by the Treasury,” the statement read.

“These purchases will be strictly limited in time”, said the BoE. The auctions will take place from today until October 14. Purchases will then be disarmed in a smooth and orderly manner, once the risks of the market’s operation have diminished.

In the statement, the BoE states that it will not hesitate to raise interest rates as much as necessary to bring inflation back to the 2% target. The BoE’s annual portfolio reduction target remains unchanged at £80bn. The start of the sales that were scheduled to start next week was postponed and now the first bond sale will be on October 31.

The announcement comes after days of sharp declines in the price of the pound sterling and a collapse in the value of British bonds. The downward trend was accentuated after the presentation of the mini-budget by the Liz Truss administration, which includes tax cuts.

The initial impact of the BoE move was a rally in the pound that lasted a few minutes and was then fully reversed. GBP/USD climbed to 1.0837 before falling to fresh daily lows at 1.0620 and bouncing back over 1.0700.