The BOE Needs to Extend, Widen and Cancel
The UK central bank needs to make clear it will buy more bonds if necessary as well as improve its safety nets.
At the Bank of England.
Photographer: Carlos Jasso/BloombergThe UK government bond market is still not working properly. On Tuesday morning, the industry lingo of the Bank of England sounded dispassionate but it is fraught: “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”
The central bank is now stepping in. In addition to the existing daily purchases of long maturity regular gilts, the BOE will each day also buy as much as £5 billion ($5.5 billion) of inflation index-linked gilts. More importantly, they are from three years out to the longest 2073 maturity (except for three specific bonds that have a material change clause). This is a significant step. Previously, it said it was only buying conventional coupon-bearing gilts longer than 20 years maturity as part of its temporary emergency program, called the Financial Stability Intervention. Gilt prices rose on the news.