Posted Sep 28, 2022, 1:15 PMUpdated on Sep 28, 2022 at 1:30 p.m.
We were expecting a massive rate hike, but on the contrary, the Bank of England (BoE) announced support for the bond market late Wednesday morning. The British central bank will buy unlimited government bonds, focusing on the longest maturities.
The objective: to try to restore calm to a bond market in disarray since the announcement of the massive tax reduction plan announced by the British government. The UK 10-year rate jumped 110 basis points in 5 days to 4.55%, its highest since 2008.
Fever outbreak
The markets are worried about this reform, which risks fueling inflation that is already difficult to control. It will inevitably push the Bank of England to tighten its monetary policy even more strongly. This hypothesis was also confirmed by Huw Pill, chief economist of the Bank of England, Tuesday afternoon. The announcement has caused a new outbreak of fever on European rates since the end of last week.
The BOE will therefore take turns buying British government bonds, “with the necessary scale” to restore serenity to the market, according to the BOE press release. Investors will thus find a buyer of last resort for their debt securities, which, in turn, will cause rates to fall. This initiative should also discourage those who speculated on a rise in British rates. It is always dangerous to challenge the central bank.
Time-limited purchases
But, warns the Old Lady of Threadneedle Street, these purchases will be “targeted” and “time-limited”. There is no question of relaunching a massive purchase program (QE) which the BOE ended in February. On the other hand, it rejects the sale of bonds which were to make it possible to reduce its balance sheet. Another clarification, this operation will be “100% compensated by the British Treasury”.
The first auctions to buy back the securities begin this Wednesday and are expected to continue until October 14. But the announcement has already led to a spectacular relaxation on the Gilts market. The British 30-year rate, which had reached its highest level in 12 years on Tuesday, lost 65 basis points to fall to 4.34%. Unheard of since 1996.
What benchmarks in a constantly changing world?
Political uncertainties, scientific innovations, war in Ukraine, energy and ecological transition… How to understand these changes? How to position yourself? Every day, the 200 journalists from the “Echos” editorial staff help you decipher economic, political and international news through surveys, analyses, press reviews, chronicles and editorials. Our subscribers know that they can rely on these resources to better navigate our complex environment and make the best strategic decisions.
