Pound plunges as Bank Of England boss tells pension funds they have until Friday to balance their books and warned the current bailout will NOT continue past then
- Andrew Bailey, Bank of England governor, said it will stop support this Friday
- The central bank has supported bond markets since last month’s mini-budget
- Pensions funds had called for support to continue until at least October 31
- Mr Bailey said this will not happen and that they need to sort out their finances
- After the statement the pound plunged from 1.1178 to 1.0969 against the dollar
The pound has plunged tonight after the Bank of England told pension funds they have until Friday to balance their books before it removes emergency support for the bond market.
Andrew Bailey, the governor of the central bank, has warned those managing pensions ‘you’ve got three days’ to sort out their finances.
The Bank has been supporting the country’s bond market in recent weeks after the markets were spooked by the Chancellor Kwasi Kwarteng’s ‘mini-budget’, but has declined to extend this support beyond Friday, October 14.
That’s despite calls from one pension industry body for the support to be continued until at least the end of the month ‘and possibly beyond’.
Following the announcement by the governor, the pound has plunged against the dollar from 1.1178 to 1.0969.
The value of the pound against the US dollar has plummeted this evening after the Bank of England’s announcement that it will end emergency support for pension funds on Friday
Andrew Bailey (pictured), Governor of the Bank of England, has told pension funds to balance their books before Friday
The support for the bond market has been put in place after Chancellor Kwasi Kwarteng’s mini-Budget sent the gilt market into a tailspin and wreaked havoc on final salary pension funds (Mr Kwarteng yesterday)
The yield on 30-year gilts had been surging towards the dangerous levels that sparked Bank action last week
Speaking at an event organised by the Institute of International Finance in Washington today, Mr Bailey said: ‘We have announced that we will be out by the end of this week. We think the re-balancing must be done.
‘And my message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done.’
Earlier on Tuesday, the Pensions and Lifetime Savings Association, an industry body, urged the BoE to extend the bond-buying programme until October 31 ‘and possibly beyond.’
But Bailey stressed that the programme was part of the BoE’s financial stability operations, not a monetary policy tool, and had to be temporary.
Earlier today the central bank announced it will broaden its purchases of gilts – the main way the Government borrows money – warning that a ‘fire sale’ poses a ‘material risk to UK financial stability’.
The emergency action came after yields on 30-year gilts crept back towards the 5 per cent level that threatened to cripple pension funds at the end of last month. Yields on the bonds rise when prices fall.
It comes almost two weeks after launching it to help pension funds cope with a slump in bond prices triggered by the announcement of unfunded tax cuts by the new government of Prime Minister Liz Truss.
‘Things seemed calmer again today,’ Bailey said, referring to conditions in the gilt market. ‘We will see.’
Industry bodies have urged the Bank to keep support in place until at least Halloween when Chancellor Kwasi Kwarteng unveils his growth plan and crucial OBR forecasts.
Some fear that package will make the situation even worse as Mr Kwarteng looks doomed to a choice between eye-watering spending curbs and abandoning the government’s flagship tax cuts.
In the turmoil that followed Mr Kwarteng’s mini-Budget, a complicated arrangement used by many funds to hedge against inflation backfired as the prices of gilts plunged – driving up the corresponding interest rates.
They have been forced to sell other gilts in order to meet margin calls for cash from investment managers, which in turn has been pushing prices down further.
The Bank calmed the situation previously by saying it would purchase up to £65billion of long-dated government bonds, propping up the market. But the latest rout is affecting index-linked gilts, with the Bank now having to buy those as well.
‘Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,’ the Bank said in a statement.
The Bank announced that it was widening its government bond purchases this morning
After the Chancellor’s mini-budget was announced last month, the markets became spooked at the prospect of unfunded tax cuts, sparking a run on the pound.
The sterling dropped to $1.03, it’s lowest ever position.
Since then it has recovered to some of its former strength and has been hovering around $1.10 since the Bank announced its support for the market and following the Government’s U-turn on its controversial plans to scrap the 45p tax rate.
This morning’s announcement that the Bank was purchasing more gilts did not do much to boost the Pound, while gilt yields dipped only slightly and shares in big pension funds were down.
The problems largely affect defined benefit funds that have to cover liabilities over long periods, although there will be concerns about contagion.
Following the Governor’s latest intervention while in Washington, the Pound has dropped further, dipping below 1.10 for the first time since late September.