Bank of England warns of continued risk of financial crisis

This is the second time over a two-day period when the Bank of England has been compelled to provide complementary support to markets of the UK, who are still trying to recover from the government's announcement that it would cut taxes and increase borrowing.

On Tuesday, the Bank of England reported about a continued "risk to financial stability of the United Kingdom" due to a dramatic selloff in government bonds, which has led to a sharp increase in the yield and pushed up the cost of borrowing in the economy. Moreover, this situation has forced several pension funds to divest assets to get cash. 

The extent of the tension in the bond market was stressed on Tuesday when the government of the United Kingdom sold £900m ($994m) of index-linked bonds maturing in 2051 at the highest yield since October 2008. 

Beginning Tuesday, the central bank will include index-linked securities in its £65bn ($71.7bn) emergency bond purchase plan, which was announced on September 28. "These operations will provide additional support to rebuild structured market conditions." 

According to the bank, the program will end as scheduled on Friday, despite appeals to extend it by another three weeks.

On Monday, the daily limit on buying the bank’s bonds was redoubled to £10bn before the end of the week. A new mechanism was announced, which is able to simplify for banks the procedure of using the central bank’s cash by accepting a broader range of assets as collateral. After the end of the emergency bond purchase plan, this program will be continued.

The Pensions and Life Savings Association, representing funds that provide retirement income for 30 million citizens, said many of its members would like to see the Bank of England continue to buy bonds until the end of the month, and maybe even longer.

On Tuesday, the Independent Institute for Fiscal Studies declared the government would need to announce more than £60bn of spending cuts just to stabilize the share of debt in national income by 2026-2027. 

These cuts may not be politically feasible given the cost-of-living crisis and the pressure on public services, especially health care and social assistance.

Benjamin Nabarro, who is a chief economist at Citigroup in the UK, said that the UK has few simple solutions for difficult economic prospects.

“In the short term, stimulating demand further simply risks exacerbating short-term problems. And with monetary and fiscal policy now working in opposite directions, we think the broader risks associated with the UK's monetary and financial stability are growing,” he said.