Bank of England launches bond-buying programme to prevent ‘material risk’ to UK financial stability
The Bank of England has launched a temporary bond-buying programme as it takes emergency action to prevent “material risk” to UK financial stability.
It revealed that it would buy as many long-dated government bonds as needed between now and 14th October in a bid to stabilise financial markets in the wake of the mayhem that followed the government’s mini-budget last Friday.
In addition to the plunge in the value of the pound, it has also seen investors demand a greater rate of return for UK government bonds – essentially IOUs.
That is because the level of borrowing required to fund the government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which immediately questioned the sustainability of the public finances.
What this action is aimed at doing is tackling consequences of rising yields, in this instance a liquidity crunch facing pension funds.
WHY THE BANK OF ENGLAND HAS ACTED
There are some very, very specific reasons why the Bank of England is intervening in this particular asset class in long-dated gilts – that’s gilts of a 20 to 30 year duration.
It affects traditional pension funds where a retiree is guaranteed a certain payout at their retirement based on their final salary when they retire.
Now, a lot of these funds use long-dated gilts as part of their investments and what has been happening over recent days is a lot of the investment funds have been asking pension funds to post more collateral – to put up cash.
It has been reported in The Times that actually these cash calls have been running into tens of billions of pounds since the beginning of the week because of this spike in long-dated gilt yields.
That is why the Bank of England is specifically targeting that with this gilt intervention.
It is aimed at seeing off a crisis that’s potentially starting to emerge in pension funds.
The Bank said in a statement: “Were dysfunction in this (long-dated bond) market to continue or worsen, there would be a material risk to UK financial stability.
“This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”
The programme marked the Bank’s first policy intervention as it battles to bring down inflation and ease the cost of living crisis. Its chief economist signalled on Tuesday that a “significant” rise in Bank rate was also likely ahead.
The government’s growth plan is only seen as adding inflationary pressure to the economy, leaving it at loggerheads with the Bank’s mandate.
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‘Crisis’ already for Truss government
The Bank said the bond purchases, which would be fully covered by the Treasury in the event of any losses, would be sold back once market conditions had stabilised.
The announcement certainly had an immediate effect on the market.
Data showed that 30-year bond yields fell back to 4.3%, having risen to levels above 5% not seen since 2022 earlier in the day. There were similar falls for 20-year yields.
Those for ten-year bonds also fell back below 4% from 4.6%.
Stock markets, which had endured widespread falls Europe-wide amid recession fears, erased some of their losses.
The FTSE 100 had ben almost 2% down but was just 0.8% lower on the day just before 1pm.
The pound, however, was a cent and a half down versus the dollar to stand at $1.0578 and a cent lower against the euro.
The single European currency was also suffering against a resurgent US currency.
In addition to its bond-buying action, the Bank said it would postpone the start of its efforts to unwind the sale of bonds it acquired through financial crisis and COVID crisis era quantitative easing.
The Bank had planned to reduce its £838bn of gilt holdings by £80bn over the next year.
Neil Wilson, chief markets analyst at Markets.com, said the Bank’s move followed evidence of “severe liquidity stress”.
This would have been particularly evident for pension funds who have faced demands for additional cash to cover off rising yields.
“The question is whether (this Bank action) acts to stabilise longer-term or if the market retests the Bank’s resolve”, he wrote.
“We’re now seeing the Bank go toe-to-toe with the market and this might not lead to any decrease in volatility”, he warned.
Tesla’s board members have reportedly started a search for someone to replace Elon Musk as CEO.
Several executive search firms were approached to find a successor around a month ago, the Wall Street Journal reported.
But it added that the current status of the succession planning for the electric car-maker was not known.
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Musk jokes about attacks on Tesla cars
Tesla’s chair, Robyn Denholm, later reacted to the report by insisting that any suggestion of an active search was “absolutely false”.
She added that the board was highly confident in Musk’s ability to continue “executing on the exciting growth plan ahead”.
Musk’s net worth has plunged and Tesla stocks have fallen sharply amid a public backlash over his role in Donald Trump’s government. He owns just under 13% of Tesla stock and is the largest shareholder.
The world’s richest man has been leading the Department of Government Efficiency (DOGE), where he has overseen the firing of tens of thousands of government employees.
He has also supported far-right parties in Europe, which has led to protests against Musk and Tesla, which have seen its showrooms and charging stations vandalised across the US and Europe.
President Trump has labelled the vandals “terrorists”.
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Musk pulls back from DOGE role
It comes after Musk said the time he spends with DOGE would “drop significantly” from May and he will dedicate more time to running his companies, such as Tesla, SpaceX and X.
The board members met with Musk and asked him to announce publicly he would spend more time at Tesla, the report said.
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It was unclear if Musk, who is a member of the board, was aware of any attempts to identify a successor, or if his pledge to spend more time at Tesla had affected succession planning, it added.
On Wednesday, Mr Trump said Musk could be part of his administration for as long as he wants.
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“You’re invited to stay as long as you want,” Mr Trump said.
He said Musk had been “treated unfairly” for his role in helping Mr Trump slash the size of the federal government, adding: “You really have sacrificed a lot.”
The thing about trade, and the economics of trade, is that it is simultaneously desperately boring and desperately important.
For example, consider a little bit of legal small print no one spent all that much time thinking about until recently – a clause in most countries’ customs arrangements known as “de minimis”.
The idea behind de minimis is quite simple.
Collecting customs can be an expensive business. You need to employ lots of people to check goods, police the system and collect the relevant customs and tariffs.
In theory, you could fund that via the customs you’re charging people to import goods into the country.
But what if the items you’re imposing tariffs and charges on are so cheap that it makes no economic sense to actually impose those charges?
Consider a £5 t-shirt of the kind you might order from an online retailer such as Shein. In theory, that garment should face a 20% tariff when it arrives from China into the UK.
But since 20% of a small number is an even smaller number, most customs authorities, including those in the UK, have taken the stance of essentially excluding any cheap imports from paying customs. This is the ‘de minimis’ rule.
There are similar rules in most countries, with the main difference being the threshold at which they kick in. Here in Britain, de minimis applies to anything worth less than £135. In the US the threshold at which you start paying customs charges is higher: $800.
Now, there’s a long and detailed set of discussions that have bored on for decades about the pros and cons of this scheme. The historic arguments against collecting those fees were that a) doing so probably cost more money than it would raise, b) scanning and checking every import would jam up ports and airports unnecessarily and c) it might have a bearing on the wider economy as it throws further sand in the wheels of commerce.
But in recent years, a host of mostly Chinese retailers have exploited the de minimis rule to ship (actually, mostly to fly) cheap products to the US, UK, Europe and beyond.
The most visible of these companies are Shein and Temu. By directly flying consignments of very cheap clothes and consumer goods to airports in the west, they have been able to undercut other companies without having to pay customs fees.
All of which is why, alongside the host of other tariffs imposed in recent weeks, Donald Trump is also doing something else – eliminating America’s de minimis rules altogether. At least, that’s the plan.
Having pledged to do so in February, the administration rapidly reversed the decision after consignments began to pile up at US airports.
However, the impending rule, which is due to kick in this Friday, sounds like it might be more concrete than the last one. And, if it’s actually imposed, tariffs of 145% will be imposed on goods that, once upon a time, didn’t face any tariffs at all. Which is a very big deal indeed.
Already, prices on websites including Shein have begun to increase. Consumers have begun to abandon the sites’ apps. And consignments of goods bound for the US from China have begun to slow.
The real question is what happens next.
Does the White House U-turn again? Or does it stand firm? Even as American consumers see the cost of their hitherto cheap goods rise, and potentially even face empty supermarket shelves, the notion of which was summoned up by a delegation of retail chiefs who met with the president last week.
The short answer, as with so much about the current US administration is: no one really knows, and if they say they do, don’t believe them.
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