BoE Doubles Bond Buying Limit to £10B in Bid to Protect Pension Funds
The Bank of England (BoE) announced it will purchase up to £10 billion of government bonds per day, doubling the initial limit of £5 billion previously announced. The move comes as the central bank aims to secure an “orderly end” to its emergency bond purchase program after the recently announced mini-budget sent the sterling to record a low.
BoE Introduces Multiple New Measures to Protect Pension Funds
The Bank of England (BoE) doubled its government bond purchases from £5 billion to £10 billion a day to ensure the bond-buying scheme ends without difficulty. Until now, the bank has purchased only around £5 billion in bonds under the £65 billion program.
“In the final week of operations, the Bank is announcing additional measures to support an orderly end of its purchase scheme,” it said in a statement. “The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to 5 billion pounds in each auction.”– The Bank of England said in a statement.
The maximum auction size of 10 billion pounds will be announced at 9 am every morning, though the BoE can still reduce offers if necessary.
Additionally, the BoE plans to introduce a temporary expanded collateral repo facility to help banks deal with liquidity issues. This facility will be available “on a daily basis until Thursday, November 10, 2022,” the bank added.
The central bank also intends to utilize its regular Indexed Long Term Repo operations each Tuesday to help ease liquidity pressures further. This facility allows market participants to borrow the bank’s cash reserves for six months for low-liquidity assets, which ultimately relieves pressure on liability-driven investment (LDI) funds).
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Sterling Rallies on Government’s Announcement
The BoE’s new measures fueled a rally in the British pound (GBP) against the US dollar (USD) Monday. The currency pair (GBP/USD) currently trades at more than $1.1.
The sterling fell to a record bottom last month after the government’s mini-budget created headwinds in financial markets. Investors were asking for significantly higher returns for their government bond investments, halving the value of some.
As a result, some funds tied to pension schemes, which invest in bonds, were forced to sell. This led to market downturn concerns, forcing the BoE to interfere and purchase government bonds, citing “a material risk to UK financial stability.”
The U.K. economy has been facing significant pressures since the BoE announced a modest interest rate hike to curb rampant inflation. Even worse, the country’s new prime minister Liz Truss unveiled the highest tax cuts in 50 years to spur economic growth with no clear plan on how to pay for them.
Do you think the new measures by the U.K. government will protect pension funds from current market headwinds? Let us know in the comments below.