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The Bank of England said Monday it will increase the size of its daily gilt purchases and implement additional measures “to support an orderly end” to its emergency bond-buying plans announced last month, aimed at preventing a financial crisis in the U.K.
Britain’s central bank was forced to intervene in the bond market after the government’s proposed debt-funded tax-cutting budget sparked a spiral of selling that endangered the U.K.’s pension sector.
As the bank previously announced, its emergency intervention will end on Friday Oct. 14.
In the first of three measures, the BoE said it is prepared to boost the size of its daily auctions to “ensure there is sufficient capacity for gilt purchases” ahead of Friday. The central bank said it has carried out eight daily auctions, offering to buy up to £40 billion ($44 billion), and has purchased around £ 5 billion ($5.5 billion) worth of bonds.
“The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5bn in each auction. The maximum auction size will be confirmed each morning at 9am and will be set at up to £10bn in today’s operation. The Bank’s existing reserve pricing mechanism will remain in operation during this period,” it said in a statement.
In a second measure, the BoE plans to launch a Temporary Expanded Collateral Repo Facility (TECRF), which will offer banks the option of easing liquidity pressures for clients’ liability-driven investments (LDI) through liquidity insurance operations, which will run beyond the end of this week.
“Under these operations, the Bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index linked gilts, and also a wider range of collateral than normally eligible under the SMF, such as corporate bond collateral,” said the BoE.
Finally, the BoE said it stands ready to support liquidity pressures facing LDI funds via regular indexed long-term repo operations.
“This permanent facility will provide additional liquidity to banks against SMF eligible collateral, including index linked gilts, and so support their lending to LDI counterparties. Liquidity is also available through the Bank’s new permanent Short Term Repo facility, launched last week, which offers an unlimited quantity of reserves at Bank Rate each Thursday,” said the BoE.
“Beyond the end of this week’s operations, the Bank will continue to work with the U.K. authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future,” it said.
The pound was barely changed in early Monday trading at $1.1090.
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