Bank's £65bn move driven by pension fund panic

The Bank of England stepped in to calm markets after some types of pension funds were at risk of collapse.

It pledged to buy £65bn of government bonds after Friday's mini-budget sparked turmoil on financial markets and the pound plunged.

Investors had demanded a much higher return for investing in government bonds, causing some to halve in value.

Pension funds, which invest in bonds, were forced to start selling, sparking fears of a fresh market downturn.

The Bank said its decision to buy government bonds at an "urgent pace" was driven by concern over "a material risk to UK financial stability."

The government borrows money to fund its spending plans by selling bonds, or "gilts", to investors such as pension funds and big banks on international markets.

But a collapse in the price of those bonds was forcing some pension funds to sell gilts and assets, further forcing down the price.

If that process had continued, there was a risk that those pension funds could have got to a position where they couldn't pay their debts.

To stop this from happening the Bank said it would buy around £65bn of gilts on Wednesday.

Joe Dabrowski, deputy director of industry group the Pensions and Lifetime Savings Association, said: "While this is a complex situation as there has been a lot of volatility in the gilt markets in recent days, we would not expect any significant issues for savers."

This is an immense show of force from the Bank of England trying to calm borrowing markets. It is already having an impact. It also raises some questions.

First and foremost it underlines that this is a crisis, with the Bank responding in emergency mode. The clear cause was the chancellor's mini-budget, leading to a loss of market confidence, and spiralling borrowing rates on government debt.

That crash in the value of loans to the government threatened to become a "material risk to financial stability", says the Bank.

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The Pensions Regulator said it is monitoring financial markets closely for their impact on the funding of defined benefit, or final salary pension schemes, a spokesperson said.

"We welcome steps announced by the Bank of England to restore orderly conditions through temporary purchases of long-dated UK government bonds," the spokesperson added.

The pound hit a record low on Monday following the chancellor's mini-budget, which pledged £45bn of tax cuts as part of a plan to boost economic growth.

The level of government borrowing required had shocked investors who questioned the sustainability of the public finances.

UK government bond markets and stock markets, which had seen sharp falls, stabilised after the Bank's announcement and the pound also rose slightly.

The government has insisted it is standing by its plan despite growing criticism.

Treasury minister Andrew Griffith said on Wednesday that its tax cuts were the "right plans" to grow the UK economy.

He said the Bank of England had "done their job" by announcing it would buy government debt to stabilise the economy.

It came after the International Monetary Fund openly criticised the government's tax cut plans, warning that the measures were likely to fuel the cost-of-living crisis and increase inequality.

Labour leader Sir Keir Starmer accused the government of "losing control of the economy,"

"What the government needs to do now is recall Parliament and abandon this budget before any more damage is done," he said.

While the government says it will not reverse its tax cuts, it has promised to release further plans to boost growth and reduce public debt on 23 November.

In a statement, the Treasury said it would continue to work closely with the Bank "in support of its financial stability and inflation objectives."

Former IMF deputy director Mohamed El-Erian told the BBC's Newsnight that UK policy had been "incredibly incoherent", with the government and the Bank of England working at cross-purposes.

Meanwhile, chief secretary to the Treasury Chris Philp confirmed on Wednesday that government departments are being asked to find spending cuts.

Speaking on ITV's Peston, Mr Philp said government departments are being asked to "look for efficiencies wherever they can find them".

The efficiencies will "stick to the targets" of the 2021 Comprehensive Spending Review, Mr Philp said.

Any savings will "enable us to target spending on things that target growth," he said.

Ministers have not decided whether benefits will rise in line with inflation in the autumn, he added.

Mr Philp rejected calls for the OBR report on the mini-budget to be published, saying projections will be held until the 23 November to ensure they are done "in a way that's organised and thoughtful".