The cost of UK government borrowing rose again on Wednesday as the Bank of England (BoE) confirms it will stop buying gilts on Friday as previously announced.
The 20-year gilt yield—the return investors get from UK government bonds—rose above 5 percent for the first time since Sept. 28, and the 30-year gilt yield also passed 5 percent on Wednesday morning.
It comes as pension funds were told they have three days to sort out their problems before the BoE stops its emergency intervention.
The central bank, which had been set to sell gilts it bought during the COVID-19 pandemic, launched a temporary programme to buy gilts on Sept. 28 after a plummet in gilt value threatened to collapse pension funds and send gilt prices on a further spiral.
The programme is due to end on Friday. The BoE said it will stick to the date amid speculations that the deadline will be extended.
Speaking at an event organised by the Institute of International Finance on Tuesday evening, BoE Governor Andrew Bailey told UK funds they have three days left to get themselves untangled.
“We have announced that we will be out by the end of this week. We think the rebalancing must be done,” he said.
“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,” the governor added.
“As the bank has made clear from the outset, its temporary and targeted purchases of gilts will end on [Oct.] 14,” the BoE said in a statement.
“The governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior level.”
The pound has also fallen sharply against the dollar on Tuesday following Bailey’s message, before starting to recover again.
Much of the blame for the recent market melt-down had been laid at the doors of Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng, who triggered panic in an already volatile market by announcing an uncosted £65 billion ($72 billion) energy support package and £45 billion ($50 billion) worth of tax cuts while failing to convince the market that its growth-boosting policies will successfully avert an economic downturn.
But Business Secretary Jacob Rees-Mogg argued the chancellor’s “mini-budget” was not the main reason behind the market turmoil.
Appearing on ITV’s “Good Morning Britain” programme on Wednesday, the Business Secretary said: “I would point to the day before, when the [BoE] Monetary Policy Committee did not put up interest rates as much as the [U.S.] Federal Reserve had. And that was the more profound effect on markets.”
“That’s an actual price and that was a widening of the differential between the benchmark which is effectively the [United States], the low-risk investment, and the UK.”
He also defended the government from the latest criticism by the International Monetary Fund regarding the UK’s financial plans, telling the programme, “Almost invariably, when you have a monetary tightening cycle, you have some element of fiscal loosening to ameliorate the difficulties that come from a monetary tightening.”
