Market turmoil

Pound falls as Bailey rules out more bond-buying

Andrew Bailey: ordered pension funds to get liquidity in order

Sterling plunged after Bank of England governor Andrew Bailey ruled out extending its emergency bond-buying programme and told pension funds they have three days to balance their liquidity positions.

The Bank was forced into the market for a second time on Monday to bring further stability and provide funds with an opportunity get their portfolios in order.

But Mr Bailey insists the intervention will end on Friday. His comments in Washington immediately sent the pound on another downward spiral, falling against the dollar from $1.1178p to $1.0969p.

Sources, however, have told the Financial Times, that that the Bank may extend the programme amid growing nervousness in the markets. Sterling bounced 0.4% to $1.1008 after the report.

The government raises money it needs for spending by selling bonds – a form of debt that is paid back plus interest over a period of between five and 30 years.

But the amount of government borrowing required to support its tax-cutting plans announced on 23 September made investors question whether the plan was sustainable.

Investors wanted a much higher return for buying government bonds, causing some to drop sharply in value. When pension funds began selling to avoid collapsing, the Bank stepped in to stabilise the market.

Trade bodies have called for the Bank to continue its programme in order to avoid a “cliff-edge” for institutions.

The Pensions and Lifetime Savings Association wants the deadline extended, possibly beyond the medium term fiscal plan due to be presented by the Chancellor on Hallowe’en.

Mr Bailey told those attending an event organised by the Institute of International Finance: “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.”

Some fear the Governor’s message will see another spike in yields on UK bonds, a signal that the bonds are a risky investment.

Danny Blanchflower, a former member of the Bank of England’s interest rate setting monetary policy committee, said the Governor was now a hostage to fortune.

“I would say…his future is now more in question – what if they have to step in again – he looks like a fool again?’ Mr Blanchflower said.

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