For the second time in two days, the Bank of England has been forced to offer extra support to UK markets still reeling from the government’s announcement last month that it would slash taxes and increase borrowing.
The central bank warned Tuesday that there was still a “material risk to UK financial stability” from a sharp-sell off in government bonds that has sent yields soaring, pushing up borrowing costs across the economy and forcing some pension funds to dump assets to raise cash.
A slump in UK government bonds that promise to protect investors from inflation — known as index-linked gilts — was the latest source of risk, it said.
“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” it said in a statement.
Starting Tuesday, the Bank of England will include index-linked gilts in its emergency £65 billion ($71.7 billion) bond-buying program announced on September 28. “These additional operations will act as a further backstop to restore orderly market conditions,” it added. The bank said the program would end as planned on Friday.
— This is a developing story and will be updated.