British policymakers are scrambling to stabilize the country’s currency and bond markets after the government threw both into turmoil.
The Bank of England (BoE) announced Wednesday (Sept. 28) that, for two weeks, it would buy long-dated government bonds—bonds that will reach maturity in 20 years or more. The move is designed to improve the price of bonds and bring yields on those bonds further down. In a follow-up announcement, the UK Treasury said that the purchases would be “strictly time limited, and completed in the next two weeks.”
But at the same time, BoE officials emphasized that more interest rate hikes were coming to tackle inflation—signaling, confusingly, that monetary policy will tighten just as they were announcing that it would loosen.
British bond yields plunged after the news, right on cue. In an email, David Blanchflower, a former BoE official, had suggested to Quartz that such purchases would be the “first of many actions to come” for the central bank, although he didn’t specify more details.
Why is the Bank of England buying bonds?
The BoE’s move follows the plummeting of the pound and British bond prices, which was triggered by the new UK government’s steep tax cuts. The cuts, announced as part of a mini-budget, stoked fears of higher inflation and, as a result, higher interest rates set by the BoE.
To cut taxes, a government has to issue more debt to fund its expenditure. Issuing this debt at a time when rates on bonds are rising makes the debt more expensive. The government’s surprise announcement pushed bond yields up even further, making the policy that much more disastrous.
“This looks like disarray—economic policy being driven by a drunk driver,” said Blanchflower, in an interview prior to the bond-buying announcement. “Global economic commentators basically think that British economic policy has lost its mind.”