The Bank of England has defended last week’s intervention in the UK government debt market, saying it stepped in to prevent a £50bn fire sale of gilts that would have taken Britain to the brink of a financial crisis.
The central bank said on Thursday that had it not launched its emergency bond-buying scheme in the wake of chancellor Kwasi Kwarteng’s “mini” Budget, pension funds would have been forced to sell £50bn worth of long-term UK government debt “in a short space of time”. This would far exceed the average daily trading volume of £12bn.
The BoE’s defence of the £65bn scheme is the clearest sign yet of how close the UK came to market meltdown following the Kwarteng’s “mini Budget with £45bn in unfunded tax cuts.
Had the central bank not intervened, it feared there would have been a “self-reinforcing spiral” that threatened “severe disruption of core funding markets and consequent widespread financial instability,” said Sir Jon Cunliffe, the BoE’s deputy governor for financial stability in a letter to the chair of parliament’s Treasury committee.
The letter also provided details on warnings received by the BoE ahead of its intervention. Cunliffe said that managers of the liability-driven investment strategies at the centre of a crisis in Britain’s pension fund industry had warned as early as Friday 23 September that the huge moves in gilt yields would force them to dump large quantities of government debt.