BoE insurance policy raises question of next act

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LONDON, Oct 10 (Reuters Breakingviews) – The Bank of England is taking out insurance against a market meltdown. On Monday, the central bank said it was prepared to double the daily limit of its bond-buying program from 5 billion pounds to 10 billion pounds. He hopes his actions will ensure an “orderly end” to the program expiring on Friday, which was launched to calm markets after the government’s unfunded spending plans triggered a massive sell-off in public debt.

Given that demand has been well below capacity, Governor Andrew Bailey’s most important decision is to temporarily extend a collateral redemption facility for assets, including corporate bonds, to help banks to cope with any market disruption due to the dumping of pension fund assets. It will cost users just 15 basis points above the base rate, although they face haircuts up to 42%.

Yet watering down the financial market mess is only the beginning. Rising market interest rates caused by the government’s growth spurt have pushed up mortgage costs, which will eat away at disposable income, just as Bailey tries to scale back bond purchases and raise rates to fight against soaring inflation. Chancellor Kwasi Kwarteng now says he will present a fiscal sustainability plan by the end of this month. But with 30-year gilt yields hovering around 4.5%, more than half a percentage point higher than after the bank first unveiled its emergency measures, the question remains. whether Prime Minister Liz Truss will ultimately undo more of her tax cuts, or whether Bailey ultimately presides over a smaller rate hike. (By Aimee Donnellan)

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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