Bank of England steps in to buy long-dated debt, pound remains under pressure

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The Bank of England said Wednesday it would temporarily buy long-dated bonds and delayed quantitative tightening.

The yield on the 10-year Gilt tumbled, falling 36 basis points to 4.15%. But pound sterling (NYSEARCA:FXB) remained lower, down 0.4% below $1.07.

"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," the BoE said.

"To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September," it said. "The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury."

"The MPC’s annual target of an £80bn stock reduction is unaffected and unchanged. In light of current market conditions, the Bank’s Executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter."

"The decision to intervene in the gilt market reveals that the BoE does not intend to increase Bank Rate all the way to the 6% level currently priced-in by markets," Pantheon Macro's Samuel Tombs said. "Short rates at that level would imply that many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability."

"While increasing Bank Rate less quickly than investors currently expect will put more downward pressure on sterling, even a 4% level of Bank Rate will lead to a big enough rise in interest payments and reduction in new borrowing to generate a recession, which will crush domestically-generated inflation," Tombs said.

Earlier, the IMF urged Prime Minister Liz Truss to change direction on eliminating the top tax rate.

"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," a spokesperson said.

As Gilt yields fell, the 10-year Treasury yield eased back from 4%.