Bank of England says £65bn gilt intervention staved off UK financial ‘spiral’

The Bank of England has defended last week’s intervention in the UK government debt market, saying it stepped in to prevent a £50bn fire sale of gilts that would have taken Britain to the brink of a financial crisis.

The central bank said on Thursday that had it not launched its emergency bond-buying scheme in the wake of chancellor Kwasi Kwarteng’s “mini” Budget, pension funds would have been forced to sell £50bn worth of long-term UK government debt “in a short space of time”. This would far exceed the average daily trading volume of £12bn.

The BoE’s defence of the scheme, in which it said it would buy up to £65bn in gilts over a 13-day period, is the clearest sign yet of how close the UK came to a market meltdown following Kwarteng’s plan for £45bn in unfunded tax cuts.

Had the central bank not intervened, it feared there would have been a “self-reinforcing spiral” that threatened “severe disruption of core funding markets and consequent widespread financial instability”, said Sir Jon Cunliffe, the BoE’s deputy governor for financial stability, in a letter to the chair of parliament’s Treasury committee.

The letter also provided details on warnings received by the BoE ahead of its intervention. Cunliffe said that managers of the liability-driven investment strategies at the centre of a crisis in Britain’s pension fund industry had warned as early as Friday September 23 that the huge moves in gilt yields would force them to dump…