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Bank of England continues to maneuver to curb 'market disruption'

The Bank of England has expanded its out-of-order purchases of government securities into inflation-linked debt instruments to curb market developments that threaten the financial stability of the United Kingdom.

The statement of the British central bank on Tuesday, October 11, justified the second intervention in the bond market during the day by the fact that since the beginning of there has been a significant process of revaluation in the British debt market, especially in the turnover of government securities linked to consumer price indices.

According to the Bank of England, abnormal market performance, in particular the prospect of self-sustaining sales withdrawals, poses a significant risk to the UK's financial stability.

The central bank announced yesterday that the remaining trading days of the unplanned asset purchase program will increase the one-day auction limit from the previous £5bn to £10bn.

In justifying the new intervention on Tuesday, the British central bank stressed that the operations are intended to help restore orderly market conditions. To this end, the Bank of England will temporarily take over inflation-tracking sovereign debt assets that sell beyond the market's intermediary capacity.

The Bank of England has also set a time limit for buying inflation-tracking government securities. This transaction will be completed this week in the same way as previously announced purchases of government securities.

On September 28, the British central bank announced an emergency intervention to buy government debt on the grounds that British financial assets - especially long-term British debt securities - were significantly overvalued.

The reason for the first announcement was that if the "abnormal behavior" of the markets continues, it will already pose a significant risk to the financial stability of the UK.

In the days leading up to the Bank of England intervention, the pound's exchange rate fell to record levels against the dollar - in some periods close to exchange rate parity - primarily because market participants were worried about the possibility of financing and the effect of increasing national debt from an unprecedented program of debt reduction. taxes announced by the new British government.

In the midst of a wave of sell-offs, yields on key UK government securities rose above 4% for the first time since the global financial crisis in 2008, and two global rating agencies: S&P Global Ratings and Fitch Ratings both downgraded the outlook on UK sovereign debt ratings from the previous "stable".

The British government announced a £45bn tax cut program in the middle of last month to cushion the effects of a soaring cost of living, inflation of around 10% that hasn't been measured in decades, and the accompanying economic downturn.

The government recently withdrew the most important element of this tax cut program, the removal of the 45% tax rate on the highest personal incomes, as a result of a very strong market backlash.

The current unscheduled purchase of assets by the Bank of England complements the largest quantitative easing program in history. The British central bank increased its asset purchases from £445bn to £895bn after the coronavirus crisis intensified two and a half years ago.

The Bank of England's Monetary Board had already voted unanimously to start phasing out this unprecedented quantitative easing program at its February interest rate meeting, but in the wake of market turmoil in recent days, the central bank announced that the program to sell British sterling-denominated sovereign debt was put on hold. Its start has been moved from the beginning of this month to October 31st.

Bank of England continues to maneuver to curb 'market disruption'