BoE's Pill: Bond Purchases Won't Cap Long-term Rates

The Bank of England's new programme of bond purchases aims to cure market dysfunction, not cap yields or offer cheaper credit to the government or financial institutions, BoE chief economist Huw Pill said.

British government bond prices slumped by their most in decades following finance minister Kwasi Kwarteng's first fiscal statement last Friday, threatening the stability of Britain's pension funds and forcing the BoE to intervene on Wednesday.

Pill said the BoE's promise to buy up to 5 billion pounds ($5.53 billion) of long-dated government bonds each day until Oct. 14 was akin to action to stop a bank run, and its actions would not stop markets' broader repricing of UK debt.

"They are not intended to cap or control longer-term interest rates or to offer more favourable underlying financing conditions to the institutions involved - or, for that matter, to the government - than would have prevailed in an orderly market environment.

In contrast to Prime Minister Liz Truss's view that the adverse market moves reflect global factors, rather than her government's budget plans, Pill said there was "undoubtedly" a UK-specific component.

"When new information - such as a change to the medium-term outlook for fiscal policy - is released, one would expect the relevant assets - in this context, government bonds - to re-price," Pill, a former Goldman Sachs economist, said.

Sterling fell to a record low against the dollar early on Monday, while 30-year gilt yields rose to a 20-year high before the BoE stepped in to back-stop the market.

Sterling and bond prices have since recovered somewhat, but both remain weaker than before Kwarteng's statement.

Pill reiterated comments he made on Wednesday that the BoE would fully assess the government's fiscal plans and recent market moves at its next Monetary Policy Committee (MPC) meeting in November, but that a big rate rise was likely.

"It is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November," he said, in remarks to be delivered to Britain's Institute of Directors later on Thursday.

The BoE would also need to consider tougher regulation to make financial institutions more resilient to sharp moves in bond prices, Pill said.

"The Bank and wider central banking community still have some work to do in throwing light on and building resilience in some of the shadowier parts of the non-bank financial sector," he said.

($1 = 0.9042 pounds)