UK government borrowing costs have risen after the Bank of England dismissed a report that it could delay the sale of billions of pounds of bonds in an attempt to boost market stability after the mini-budget.
The yield – or interest rate – on 10-year government bonds rose by more than 0.1 percentage points to trade above 4% after the central bank said the report in the Financial Times was inaccurate.
Threadneedle Street’s rate-setting monetary policy committee (MPC) announced plans last month to begin selling £80bn of UK government bonds from 31 October to wind down the portfolio of assets it had built up under its quantitative easing programme since the 2008 financial crisis.
The process to scale back the £838bn of bonds – or gilts – on its balance sheet is known as quantitative tightening (QT), considered by economists as one of the Bank’s most powerful tools for tackling inflation, which recently rose to its highest rate in 40 years.
Questions have been raised after the market meltdown sparked by Kwasi Kwarteng’s mini-budget last month. The FT said the start of the process would be delayed, with the Bank’s top officials of the view that gilt markets had been “very distressed” in recent weeks.
The Bank dismissed the accuracy of the report. A spokesperson said: “This morning’s FT report that the BoE has decided to delay MPC gilt sales (‘QT’) is inaccurate.”
The government’s borrowing costs rose on financial markets across short and long-term bonds after the statement. The pound fell by 0.7% against the dollar on Tuesday morning, trading at below $1.13.
Speculation over a delay has been mounting after the government said it would announce revised debt-cutting plans on 31 October, the same day as the Bank plans to begin its sale process. The government announcement is expected to influence central bank policy and financial markets.
Threadneedle Street was also forced to intervene in markets to protect pension funds from the market turmoil, with a promise to buy up to £65bn of gilts on the grounds of financial stability. The intervention ended on Friday after the Bank’s governor, Andrew Bailey, insisted the scheme must close.
The Bank’s MPC has previously acknowledged it would only begin government bond sales “subject to economic and market conditions being appropriate,” but said at its last meeting in September, the day before the mini-budget, that it should proceed.
Gilt yields fell on Monday after Jeremy Hunt’s move to scrap most of the unfunded tax cuts contained in the mini-budget, although they still remain higher than the levels they were at before his predecessor’s ill-received statement.
Analysts said there was potential for renewed instability in the gilt market given that a large amount of uncertainty still remained over the government’s spending plans.
Russ Mould, the investment director at AJ Bell, said: “There had been some concerns that the Bank selling bonds would push down prices and push up yields just at the point when the cost of government borrowing was starting to come back down.
“After the chaos we’ve seen in recent weeks, markets could really do with some calm.”
