# Explainer-Why is Bank of England acting again? What next in the UK crisis? Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-10-11 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Bank of England's Bond Buying: Addressing Financial Meta Description: Learn why the BoE is buying bonds to prevent chaos in the markets and safeguard the economy from recession risks and pension industry upheaval. URL: https://financedigest.com/explainer-why-is-bank-of-england-acting-again-what-next-in-the-uk-crisis-2html ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-10-11t135823z1lynxmpei9a0rortroptp4britain-boe-1736815053427-compressed.jpg) LONDON (Reuters) – The Bank of England again sought to stem a sharp sell-off in Britain’s 2.1 trillion pound ($2.3 trillion) government bond markets on Tuesday, expanding its emergency buying to inflation-linked debt. The slump in government bond prices – and the subsequent surge in yields – has threatened to wreak havoc in the country’s pension industry, hurt the housing market and increase the recession risks for the broader economy. Following is a summary of key questions raised by the upheaval in financial markets. WHY IS BRITAIN [FACING ANOTHER FINANCIAL CRISIS](https://www.financedigest.com/estonias-pro-kyiv-government-faces-election-test-amid-cost-of-living-crisis.html "Estonia’s pro-Kyiv government faces election test amid cost of living crisis")? Investors were already worried about the huge cost of the tax cuts and [energy](https://www.financedigest.com/britains-tax-take-risks-blowing-green-energy-off-target.html "Britain’s tax take risks blowing green energy off target") subsidies promised by new Prime Minister Liz Truss even before Finance Minister Kwasi Kwarteng announced more cuts to taxes late last month. Rather than heed Kwarteng’s promises of stronger economic growth, investors took fright at the prospect of higher inflation [caused by unfunded fiscal policy – which they saw as forcing the Bank](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") of England to speed up its interest rate increases. Sterling slid against the U.S. dollar, adding to [inflation pressure](https://www.financedigest.com/analysis-china-central-bank-under-pressure-to-ease-is-hemmed-in-by-inflation-fed-jitters.html "Analysis-China central bank, under pressure to ease, is hemmed-in by inflation, Fed jitters") in a country that relies on imports for its fuel, food and other products. Even more worryingly for the BoE, [yields on government bonds](https://www.financedigest.com/stocks-fall-bond-yields-rise-as-focus-shifts-to-fed-rate-outlook.html "Stocks fall, bond yields rise as focus shifts to Fed, rate outlook") leapt, especially on long-term debt, causing problems in Britain’s pensions industry. WHY IS THE [BANK OF ENGLAND](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure") BUYING BONDS AGAIN? By buying bonds, the BoE is [seeking to reverse what it sees as “dysfunction” in the bond](https://www.financedigest.com/investors-seek-higher-returns-as-catastrophe-bond-issuance-slows-during-q2-according-to-aon-study.html "INVESTORS SEEK HIGHER RETURNS AS CATASTROPHE BOND ISSUANCE SLOWS DURING Q2, ACCORDING TO AON STUDY") market. Specifically, the central [bank was seeking](https://www.financedigest.com/seven-out-of-ten-uk-adults-aged-25-44-never-seek-advice-on-dealing-with-debts-despite-depending-on-the-bank-of-mum-and-dad.html "Seven out of ten UK adults aged 25-44 never seek advice on dealing with debts despite depending on the bank of mum and dad") to address problems facing pension funds. They were [forced to stump up vast amounts of emergency collateral in liability-driven investments](https://www.financedigest.com/analysis-uk-crisis-forces-off-kilter-businesses-to-halt-investment.html "Analysis-UK crisis forces ‘off kilter’ businesses to halt investment") (LDI), which use derivatives to hedge against shortfalls in pension pots, after British government bonds dropped sharply in value. Many did so by selling gilts, sparking a vicious cycle of falling [prices that forced the BoE to pledge to buy](https://www.financedigest.com/4-for-the-price-of-1-what-you-can-buy-in-the-uks-top-northern-cities-for-the-price-of-a-london-pad.html "4 for the price of 1: What you can buy in the UK’s top northern cities for the price of a London pad") as much as 65 billion pounds of long-dated conventional government bonds between Sept. 28 and Oct. 14. While this intervention bolstered that particular section of the gilt market, this week a fire-sale of inflation-linked gilts – which are pegged to changes in [consumer prices](https://www.financedigest.com/investors-warn-big-consumer-firms-over-price-hikes-as-competitors-gain.html "Investors warn big consumer firms over price hikes as competitors gain") – took place in similar circumstances. A day later, the BoE [announced it would also buy](https://www.financedigest.com/lumen-research-and-tvision-announce-global-partnership-for-advanced-attention-first-measurement-and-media-buying.html "Lumen Research and TVision Announce Global Partnership for Advanced Attention-First Measurement and Media Buying") these bonds. Until the end of this week, the BoE will now spend up to 10 billion [pounds a day buying gilts:](https://www.financedigest.com/the-pound-gilts-and-stocks-likely-winners-and-losers-from-uk-budget.html "The pound, gilts and stocks: likely winners and losers from UK budget") half allocated to linkers, and the other half to long-dated standard bonds. By temporarily acting as a buyer for the bonds, the BoE aims to prevent panic [selling and give pension funds time](https://www.financedigest.com/best-selling-books-of-all-time.html "Best selling books of all time") to sort out their liquidity problems. The buying programme is different to the one the BoE launched during the 2020 [COVID-19 pandemic](https://www.financedigest.com/pandemic-restrictions-that-hampered-the-circulation-of-viruses-other-than-covid-19.html "Pandemic restrictions that hampered the circulation of viruses other than COVID-19"), after the Brexit referendum and following the 2008-09 financial crisis, as it is only designed to be very short term. [Investors are nervous about the prospects for gilts after Friday and a pension industry body has urged the BoE to extend its support to the end](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") of this month. WHAT CAN TRUSS AND KWARTENG DO NOW? Investors are waiting for Kwarteng to explain his fiscal plans and [publish new forecasts](https://www.financedigest.com/publisher-bloomsbury-casts-upbeat-forecast-says-books-affordable-pastime.html "Publisher Bloomsbury casts upbeat forecast, says books ‘affordable pastime’") from the Office for Budget Responsibility on Oct. 31 – but [turmoil in markets](https://www.financedigest.com/britains-political-and-market-turmoil-2.html "Britain’s political and market turmoil") could force more action from either the BoE or government in the meantime. Truss promised to smash the economic “orthodoxy” in her bid to become leader of the Conservative Party and Kwarteng’s tax [cut announcements represented a doubling down on the pledges](https://www.financedigest.com/citi-pledges-to-cut-emissions-for-more-sectors-including-coal.html "Citi pledges to cut emissions for more sectors including coal") she made during the campaign. Downing Street [says there will be more announcements of reforms](https://www.financedigest.com/boes-bailey-says-bank-reforms-worked-but-questions-about-liquidity-buffers.html "BoE’s Bailey says bank reforms worked but questions about liquidity buffers") to improve the growth potential of Britain’s economy – which are likely to involve attempts at cutting back planning rules, changes to the immigration system and more investment in training and infrastructure. WHAT DOES ALL THIS MEAN FOR THE [HOUSING MARKET](https://www.financedigest.com/uk-housing-market-keeps-momentum-but-slowdown-ahead-halifax.html "UK housing market keeps momentum but slowdown ahead: Halifax")? Mortgage lenders have scrambled to keep up with wild swings in the sterling [funding markets](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") that determine the mortgage rates they offer to homeowners. Some lenders temporarily stopped issuing mortgages to new customers and others ramped up repayment rates for new [loans to levels likely to stretch millions](https://www.financedigest.com/britains-lloyds-racks-up-350-million-of-likely-scam-covid-loans.html "Britain’s Lloyds racks up 0 million of likely scam COVID loans") of existing homeowners and make new mortgages unaffordable for many others. Mortgage deals for new customers now feature rates at around 5%-6% – a steep increase from the norm of around 2% for the last five years which is prompting rising concern of a collapse in the [property market](https://www.financedigest.com/2017-spanish-property-market-gems-kyero-com-gazes-into-the-crystal-ball.html "2017 Spanish property market gems – Kyero.com gazes into the crystal ball") further down the line. (Writing by William Schomberg, David Milliken and Andy Bruce; editing by David Evans) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---