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 14 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.
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.”
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1:38
Senior Tory blames mini-budget for turmoil
City minister Andrew Griffith denied that the government should take responsibiity for the crisis.
“We are seeing the same impact of Putin’s war in Ukraine cascading through things like the cost of energy, some of the supply side implications of that, and that’s impacting every major economy and just to save every major economy, you’re seeing interest rates going up as well.
“Every major economy is dealing with exactly the same issues,” he told Sky’s economics editor Ed Conway.
“They [the bank] have made a targeted and timely intervention in the market. That’s their decision, but they’ve done so working very closely with the chancellor,” he added.
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.
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 2002 earlier in the day. There were similar falls for 20-year yields.
Those for 10-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 been 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 shortly after the announcement, to stand at $1.0578, and a cent lower against the euro. It later moved back towards $1.07 as market surprise at the intervention eased.
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.”
Image: One of three Russian MiG-31 fighter jets in images shared by Sweden’s armed forces. Pic: Swedish Armed Forces
The three incursions into NATO airspace fuelled concerns about the potential expansion of Russia‘s three-year war in Ukraine and have been seen as an attempt by Moscow to test the military alliance’s response.
The incident over Poland prompted its prime minister, Donald Tusk, to warn that his country was the closest to “open conflict” it had been since the Second World War, while the UK announced it would provide Warsaw with extra air cover.
Two RAF Typhoons, supported by an RAF Voyager air-to-air refuelling plane, took off from RAF Coningsby, in Lincolnshire, on Friday night to defend Poland’s skies before returning safely early on Saturday morning.
Image: A Gerbera drone landed in a field in the Olesno region of Poland
Defence Secretary John Healey said the mission sends a clear signal that “NATO airspace will be defended”.
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“I’m proud of the outstanding British pilots and air crew who took part in this successful operation to defend our allies from reckless Russian aggression.”
He said the mission was “especially poignant” coming as the UK marks the 85th anniversary of the Battle of Britain – when Polish pilots came to the aid of the UK – this weekend.
The head of the RAF, Air Chief Marshal Harv Smyth, said: “This sortie marks the RAF’s first operational mission on Eastern Sentry, reinforcing the UK’s steadfast commitment to NATO and its allies.
“We remain agile, integrated, and ready to project airpower at range.”
The prime minister had called on Benjamin Netanyahu’s government to take substantive steps to end the “appalling situation in Gaza“, agree to a ceasefire, commit to a long-term sustainable peace, allow the UN to restart the supply of aid, and not annex the West Bank.
The Israeli foreign ministry furiously rejected his statement, with Mr Netanyahu claiming that “Starmer rewards Hamas‘s monstrous terrorism and punishes its victims”.
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1:28
Could recognition of Palestine change the West Bank?
Ilay David, brother of Hamas hostage Evyatar David, who was seen emaciated in a video last month, said giving recognition was “like saying to Hamas: ‘It is OK, you can keep starving the hostages, you can keep using them as human shields.’
“This kind of recognition gives Hamas power to be stubborn in negotiations. That is the last thing we need right now.”
There has been no ceasefire, and the situation in Gaza has deteriorated, with a declaration of a famine in Gaza City and the expansion of Israeli military operations.
Israel has launched a major ground offensive to seize all of Gaza City and destroy Hamas in an operation which has prompted widespread condemnation, with UK Foreign Secretary Yvette Cooper calling it “utterly reckless and appalling”.
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15:16
What changed in UK’s Gaza policy?
Earlier this month, a UN commission of inquiry concluded that Israel has committed genocide against Palestinians in Gaza. Israel said the claim was “distorted and false”.
The UK will join 147 of the 193 members of the UN who recognise Palestine ahead of the UN General Assembly in New York on Monday.
Other nations, including France, Australia and Canada, have said they plan to take the same step at the UN gathering as part of a broad international effort to put pressure on Israel.
During a joint news conference with the prime minister at Chequers on Thursday, Donald Trump said he disagreed with recognition, and US politicians have urged the UK and other allies to reverse their stance.
Image: Sir Keir Starmer is expected to deliver the announcement on Sunday. Pic: PA
Sky News understands that Israel is considering options in response to the UK’s decision, but the strength of that reaction is still under consideration.
Family members of some of the 48 hostages still in captivity, after Hamas and other militant groups stormed into Israel on 7 October 2023, have written an open letter to Sir Keir, condemning the move.
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2:38
Israel ramps up attacks on Gaza City
“Hamas has already celebrated the UK’s decision as a victory and reneged on a ceasefire deal,” they said.
“We write to you with a simple plea – do not take this step until our loved ones are home and in our arms.”
The UK government is understood to be looking at further sanctions on Hamas, and has demanded the group release all hostages, agree to an immediate ceasefire, accept it will have no role in governing Gaza, and commit to disarmament.
Heathrow was among a number of major airports across Europe hit by delays after a suspected cyber attack that targeted a service provider for check-in and boarding systems.
The “technical issue” affecting Collins Aerospace, which provides check-in and boarding services for various airlines, resulted in 14 flights being cancelled at Brussels Airport on Saturday, and several more being delayed at London Heathrow, Berlin, and Dublin, among others.
Passengers have reported being unable to check in online, instead queuing for hours for staff to deal with them manually at desks and departure gates, only to be told their flights are not taking off.
Helen Steel, 49, left Dorset for Heathrow at 3am to travel home to Oslo, with her cat Thomas – but was “shouted at by staff” who told her she would not be able to fly until Sunday.
Describing the situation as an “absolute nightmare”, she said: “I’ve got an animal here, so I’m very concerned about his welfare.
“I’ve been shouted at twice and I broke down in tears because I was worried about him. None of us have had any information whatsoever. Whenever we ask ground staff, they shout at us.”
Ms Steel says she spent two hours in the queue on the phone to customer service and is now having to find a hotel to stay in overnight.
Sam arrived at Heathrow expecting to drop his girlfriend off for her flight to Rio de Janeiro – but was still at the airport seven hours later.
Image: Sam has been at Heathrow for seven hours after his girlfriend’s flight to Rio was cancelled
When they arrived, it was “chaos everywhere”, he told Sky News, with “nobody seeming to know what was going on”.
The couple say they were not told about the cyber attack by airport staff, finding out about it online instead.
After queuing for three hours, they made it to the front, only to be told the plane was not taking off, he adds.
“Her flight was at 8.40am and it was held back until 10.15am. At 10.10am they sent everyone away and told them to contact the airline. But there are no representatives for any airlines whatsoever. It’s been a bit of a farce.
“Nobody knew where they were going – and they were sending people left, right, and centre.
“She’s going tomorrow now, but we’ve got to find a hotel, and no one is here to give us any hotel vouchers. They just give you a piece of paper and say ‘you’ve got to pay for it yourself’.”
Image: Passengers wait for news at Heathrow Terminal 4. Pic: PA
‘Insane queues’ and ‘skeleton staff’
Passenger Tereza Pultarova waited around 10 hours at Heathrow after she arrived at 4.30am for her flight to Cape Town via Amsterdam.
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6:32
Tereza Pultarova had to wait 10 hours at Heathrow
“We were kind of stranded here because KLM wasn’t able to issue us boarding passes digitally, and requested us to collect them at the check-in desk,” she said.
“And then they told us that there is some sort of global issue with the system they’re using for check-in and boarding, and they have to do everything manually. So then they were checking in people at the rate of, like, one person per 10 minutes.
“I’m not exaggerating. It was just insane, the queue wasn’t moving. And then suddenly they said, ‘Oh, the flight will be departing, we’re closing the gate’.
Maria Casey was due to fly to Thailand with Etihad Airways – but had to wait three hours to drop off her luggage at Heathrow, with staff taking between five and 10 minutes to deal with each passenger.
Image: Queues at Heathrow. Pic: PA
“The queues are terrible,” she told Sky News. “It was an absolute skeleton staff. Out of six of the desks there were probably two people”.
A Heathrow spokesperson advised people to arrive no more than three hours early for a flight and apologised for any inconvenience.
It is understood British Airways at Terminal 5 remains unaffected and is operating as normal.
Collins Aerospace said it is working to resolve the issue as soon as possible.
“We have become aware of a cyber-related disruption to our Muse (Multi-User System Environment) software in select airports, the firm said in a statement.
“The impact is limited to electronic customer check-in and baggage drop and can be mitigated with manual check-in operations. We are actively working to resolve the issue and restore full functionality to our customers as quickly as possible.”