Bank of England warns risk of UK financial crisis hasn’t gone away

London
CNN Business
—
For the second time in two days, the Bank of England has been forced to offer extra support to UK markets still reeling from the government’s announcement last month that it would slash taxes and increase borrowing.

The central bank warned Tuesday that there was still a “material risk to UK financial stability” from a sharp-sell off in government bonds that has sent yields soaring, pushing up borrowing costs across the economy and forcing some pension funds to dump assets to raise cash.

A slump in UK government bonds that promise to protect investors from inflation — known as index-linked gilts — was the latest source of risk, it said.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” it said in a statement.

The extent of the bond market strain was underscored Tuesday when the UK government sold £900 million ($994 million) of index-linked gilts due in 2051 at the highest yield since October 2008, according to Reuters.

Starting Tuesday, the Bank of England will include index-linked gilts in its emergency £65 billion ($71.7 billion) bond-buying program announced on Sept. 28. “These additional operations will act as a further backstop to restore orderly market conditions,” it added. The bank said the program would end as planned on Friday.

City workers walk near the Bank of England (BOE) in the City of London, UK, on Monday, Oct. 3, 2022.
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On Monday, it doubled the daily limit on its bond-buying to £10 billion through the end of the week. It also announced a new facility that will make it easier for banks to tap central bank cash by accepting a wider range of assets as collateral. That program will continue once the emergency bond-buying program ends.