The Bank of England (BoE) has today widened the scope of its daily gilt purchase operations to also include the purchase of index-linked gilts.

This follows the move by the central bank yesterday that saw it increase the daily buying limit of its bond intervention from £5bn to £10bn, in an attempt to calm fears of a pension fund sell-off.

The BoE stated that the beginning of this week has seen a “further significant repricing” of UK government debt, particularly index-linked gilts, and warned that dysfunction in this market poses “a material risk to UK financial stability”.

In the wake of the Chancellor’s recent mini-Budget, the BoE was forced to intervene because of the run that Kwasi Kwarteng’s policies created in the UK gilt market.

On 28 September, the BoE announced that it would make temporary and targeted purchases of gilts to help restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses. As previously announced, the Bank still intends to end these operations and cease all gilt purchases on Friday 14 October.

Therefore, the BoE announced today that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. It said this enhancement to its operations will be in effect until Friday, alongside the Bank’s existing daily conventional gilt purchase auctions.

Reacting to the news, head of fixed interest research at Quilter Cheviot, Richard Carter, commented: “This morning, the BoE has once again felt the need to intervene in the fixed income market following yesterday’s announcement as it seeks to calm nerves and return stability to government bond markets. We are in somewhat unprecedented territory here and as a result yields continue to climb higher as investor fears are yet to be eased.

“The move by the BoE today to include index-linked gilts in their emergency quantitative easing programme is probably sensible given the massive rise in yields that occurred yesterday, however, it is going to be an incredibly difficult balancing act at a time when the Bank wants to be raising interest rates in order to bring inflation down. It is stuck between a rock and the hard place in combatting inflation at the same time as fiscal policy causes shockwaves in markets.”

Investment director at AJ Bell, Russ Mould, added: “The BoE hopes to avoid a crisis in the market by being a willing buyer of bonds from pension funds who are under pressure. These pension funds will welcome today’s move, but whether the broader market shares the same enthusiasm remains to be seen.

“The key sticking point is that the support measures are only scheduled to last until Friday. Will that be long enough, or will the BoE extend the support scheme? Extending it could go one of two ways – the market either applauds the move and breathes a sigh of relief or it gets even more worried, thinking that the extra time suggests the crisis is more severe than originally thought.”

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