Bank of England to buy bonds to stabilise market

LONDON (Reuters) - The Bank of England said on Wednesday it would start a temporary programme of bond purchases to stabilise the market, and postpone the planned start of its gilt sale programme.

The BoE said it was keeping its goal to reduce its 838 billion pounds ($892 billion) of gilt holdings by 80 billion pounds over the next year, but would postpone the start of sales - due to begin next week - because of the market conditions.

Its decision follows turmoil in UK markets, which have seen British gilt yields soar and sterling fall to record lows, with investor confidence shaken by Friday's mini-budget.

MARKET REACTION:

FOREX: It was another turbulent session for sterling and the currency was last down 1.6% at $1.0562 .

BONDS: Gilt futures soared and gilt yields fell sharply. The UK's 10-year bond yield was last down 20 basis points at 4.22%.

STOCKS: The FTSE-100 stock index was last down 0.5%, having fallen to its lowest since March earlier on .

COMMENTS:

ALLAN MONKS, ECONOMIST, JP MORGAN

"While the BoE’s response looks appropriate given recent developments in the gilt market, the optics are not favorable for the Bank and will inevitably prompt discussions about fiscal dominance and a monetary financing of the deficit. We think this is not entirely warranted, as the BoE has signalled it wants to exit this intervention at the first available opportunity and remains committed to undertaking sales soon after.

"However, the problem is whether market conditions will allow the BoE to do so on the time scale it has suggested, which in turn depend on the actions of the government."

SAMUEL TOMBS, CHIEF UK ECONOMIST, PANTHEON MACROECONOMICS

"The decision to intervene in the gilt market reveals that the BoE does not intend to increase Bank Rate all the way to the 6% level currently priced-in by markets.

"Short rates at that level would imply that many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability.

"While increasing Bank Rate less quickly than investors currently expect will put more downward pressure on sterling, even a 4% level of Bank Rate will lead to a big enough rise in interest payments and reduction in new borrowing to generate a recession, which will crush domestically-generated inflation."

GILLES MOEC, CHIEF ECONOMIST, AXA

"It creates all sorts of issues. The move everyone was expecting was a rate hike to deal with the inflation shock."

"Instead it operates on the long end of the curve - so it is treating the symptom not the cause."

"It creates a very complicated situation because it supports the government in the short term".

"The government's measures were met with a very adverse reaction ... and now what they have is the Bank of England dampening the adverse bond market reaction rather than hiking rates."

"So from the government's point of view it's hugely beneficial. The question becomes, how long will it last and will it be just a stop gap for the government to turn things around?"

"The FX market was expecting a rate hike so it might not shore up sterling. It puts the BoE in a complicated situation."

STUART CLARK, PORTFOLIO MANAGER, QUILTER

"We have just seen the Bank of England (BoE) intervene in the gilt market today to try and calm the situation and this should provide some reassurance to the market. However, the BoE is trying to slow down all the plates spinning in the air without letting any fall and the Treasury during the 'mini-budget' on Friday threw a bunch of marbles onto the floor to make it more challenging.

By instigating targeted, controlled and (apparently) time limited intervention the BoE will try to support the economy in order to avoid a more expensive bailout if conditions continue to materially deteriorate while maintaining independence. Above all we need to see the government regain credibility with domestic and international investors and explain how they plan to pay for these tax cuts other than just through borrowing."

CARLO FRANCHINI, HEAD OF INSTITUTIONAL CLIENTS, BANCA IFIGEST, MILAN

"The Bank of England is restoring some calm to the markets. Finally there is a central bank that is moving in the right direction. Italy's BTPs and German Bunds have recovered and equities are above lows as well."

STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL

"The announcement suggests the BoE was concerned that it was losing control of the yield curve. Delaying the start of its own gilt sales and announcing purchases of longer date gilts suggests that the sales would have been skewed more to the shorter dates, and so taking both measures together effectively puts downwards pressure across the whole of the curve.

"It is a measure to try and restore order to the gilt market and in doing so avoid the need for any more drastic action being taken before November's MPC (Monetary Policy Committee)meeting."

JOHN HARDY, HEAD OF FX STRATEGY, SAXO BANK, DENMARK

"The pressure on UK rates to rise is breaking financial markets in the UK, which is at odds with the Bank of England’s intention to tighten policy, which means they had to move.

As the rest of the world is in tightening mode, this should be sterling negative. We have seen some oddball reactions as the market tried to deal with it, and there was a bit of shift in risk sentiment with people thinking ‘OMG is the Bank of England the canary in the coalmine, will other central banks have to shift?’, but it's a bit early for that trade. All other things being equal this should be sterling negative."

CHARLES DIEBEL, HEAD OF FIXED INCOME STRATEGY, MEDIOLANUM ASSET MANAGEMENT, LONDON

"With the announcement just now they have put something of a floor under the market in the short term.

"However, the pro cyclical fiscal policy remains and as such the respite may not be long lasting."

"That said, given the announcement there is a line in the sand with respect to their tolerance for weakness, so something of a "Fed Put" is now in effect…a bank put I guess."

KENNETH BROUX, CURRENCY STRATEGIST, SOCIETE GENERALE, LONDON

"This intervention follows the statement earlier in the week. They have to stabilise the bond market as confidence has totally evaporated.

The surge in bond yields threatens the housing market and broader economy. But the BoE still has to raise the policy rate.

You also have the contagion element. The IMF and the US Treasury waded in yesterday in fear of global contagion from Gilts to other markets.

The BoE is stepping in for the government who is not going to turn on fiscal policy."

(Reporting by the London Markets Team; Compiled by Dhara Ranasinghe)