The Bank of England has suspended its planned sale of gilts in response to turmoil in the bond markets on the wake of the new government's mini-Budget on Friday.
Warning of a "material risk to UK financial stability", it said in a statement on Wednesday (September 28) that it would temporarily purchase long-dated UK government bonds instead, from today.
This was to "restore orderly market conditions" and would be carried out on "whatever scale is necessary" to effect this outcome.
It added this would be fully indemnified by HM Treasury.
The Bank stated: "As the governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.
"This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this 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.
"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 value of UK Treasuries fell sharply after the new chancellor's fiscal statement on Friday, which announced a raft of unfunded tax cuts for businesses and high earners as well as home buyers.
The yield on the 10-year UK government bond surged above 4 per cent on Monday morning as the pound crashed, after investors decided they had little faith in the economic plans of Liz Truss's government.
As of Tuesday (September 27) the 10-year gilt yield stood at 4.1 per cent, having increased by 1.26 percentage points so far in September.
The yield on the two-year gilt, which is sensitive to Bank of England policy, stood at 4.3 per cent, having surged from around 3 per cent since the start of the month.
Meanwhile mortgage lenders began to pull deals amid concerns over rising rates. Gilt yields impact swap rates, which lenders’ use to guide their mortgage offers.
The Bank said today its Financial Policy Committee welcomed the its plans for temporary and targeted purchases in the gilt market on financial stability grounds.
It added the auctions would be strictly time limited and take place from today until October 14.
"The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided."
The MPC’s annual target of an £80bn stock reduction is unaffected, though the Bank has postponed the beginning of gilt sales to October 31.
It will still make an assessment on interest rates at its November meeting as planned.
A HM Treasury spokesperson said: “The chancellor is committed to the Bank of England’s independence. The government will continue to work closely with the Bank in support of its financial stability and inflation objectives.”
