The Bank of England on Wednesday announced several new market actions to try and ease any issues.
“As the Governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets,” said a press release from the Bank of England.
"Recent outsized volatility in UK yields has had direct
repercussions on the financial ‘plumbing’.”
Earlier in the day, the UK media reported chancellor Kwasi Kwarteng was unlikely to reverse any of the positions he took in the government’s mini-budget on Friday, which were seen as the reason for the pound’s crash and subsequent market actions.
Market reaction was swift, with many saying it showed the real problems at the heart of the response. “The Bank of England’s latest response supports the view that this is not really a sterling crisis but a gilt market crisis that has validated antipathy towards GBP,” said TS Lombard. “Recent outsized volatility in UK yields has had direct repercussions not only on the mortgage market but also the financial ‘plumbing’, as it helped trigger margin calls related to pension funds’ LDI exposures.”
Media reports in the UK said the bank response was partially due to a “run dynamic” on pension funds, with one equivocating it to “a wholesale equivalent of the run which destroyed Northern Rock.” Other British media outlets described it as a pensions funds crisis” partly due to rise in gilt yields.
“The purpose of these purchases will be to restore orderly market conditions.
The purchases will be carried out on whatever scale is necessary.”
The bank warned of economic tightening due to market changes. “In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses,” it said.
To achieve this, the Bank said it would carry out temporary purchases of long-dated UK government bonds from 28 September. “The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to affect this outcome.”
“The Bank of England’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market.” The release also said that the Bank recommended action be taken.
The statement went onto say that these purchases will be strictly time limited. “The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.”
As well as this, several UK-based insurer’s also saw their stock’s slip during the session. Aviva Plc. was down 6.38% at 15:00 GMT, Legal & General Group Plc fell 7.28%, RSA Insurance Group fell 5.24%, Prudential Plc. was 2.9% down. Hiscox Ltd. was down 2.15%. Beazley Plc., also fell by 1%.
Earlier in the day, the International Monetary Fund had given a rebuke to the UK government on its policy direction. “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” said the Fund’s statement.
They added that the Bank of England’s bond purchases will go some way towards restoring a sense of stability in the marketplace. “However, with fiscal policy still in flux, next steps on Brexit still uncertain and US monetary policy in aggressive tightening mode, UK assets are not out of the woods yet.”