The Bank continues to monitor financial market developments very closely in light of the significant revaluation of assets in recent weeks. He has also worked with UK authorities to address risks to the resilience of Liability Driven Investment (LDI) funds resulting from volatility in the long-term government bond (gilt) market.
On September 28, the Bank announced that, in line with its objective of financial stability, it would make temporary and targeted purchases of gilts to help restore market functioning and reduce any risk of contagion to credit conditions for households and businesses. British companies.
As previously announced, the Bank plans to end these operations and cease all purchases of gilts on Friday, October 14.
On October 10, the Bank announced additional measures to support market functioning and the orderly end of its gilt buying program. These included the launch of a Temporary Extended Collateral Repo Facility (TECRF) through which banks would be able to help ease the liquidity pressures facing their clients’ LDI funds through liquidity assurance operations, and expanding the scale of its remaining state buy auctions.
The objective of these operations is to allow the LDI funds to deal with the risks weighing on their resilience to the volatility of the long-term gilt market. LDI funds have made substantial progress in this regard over the past week. However, the start of this week saw a further significant repricing of UK government debt, particularly pegged gilts. The dysfunction of this market and the prospect of a self-perpetuating “fire-selling” dynamic pose a significant risk to the financial stability of the United Kingdom.
The Bank is therefore announcing today that it will broaden the scope of its daily gilt buying operations to also include index-linked gilt buying. This enhancement to our operations will be in effect from October 11, 2022 through October 14, 2022, alongside the Bank’s existing daily conventional gilt purchase auctions.
These additional trades will serve as an additional safety net to restore orderly market conditions by temporarily absorbing the sale of indexed gilts that exceeds the market’s intermediation capacity. As with conventional gilt purchase transactions, these additional indexed gilt purchases will be time-limited and fully compensated by Her Majesty’s Treasury. The Bank also consulted the Debt Management Office.
As announced on October 10, the Bank is ready to buy up to £10 billion worth of gilts each day, of which up to £5 billion will be allocated to long-dated conventional gilts and up to £5 billion sterling to pegged gilts. The pricing of this additional operation will reflect its backstop nature and that it is not a monetary policy instrument. The total size of these auctions will be under continuous review. All purchases will be settled in a smooth and orderly manner once the risks to the functioning of the market are deemed to have subsided.
The Bank will temporarily suspend its CBPS sale operations this week. Confirmation of these restarts will be included in the Bank’s regular operational announcements.
The Bank will publish a market notice confirming the operational details of the Bank’s index-linked gilt purchases.