London, 7 October 2022 (TDI): The England government bonds have lost their actual market value due to the announcement of the government in September to cut taxes.
This announcement created fear in the financial markets leading to the government bonds selling in the market with less worth.
The central bank financial policy committee stepped forward to intervene when the UK government bonds known as “gilt” were massively sold. The bank intervened after the announcement of the fiscal policy by the government in September.
The Monetary Move
The Bank of England said that her budget caused a “self-reinforcing spiral”. This spiral was threatening severe disruption of funding markets and could cause financial instability.
The 1.5 trillion pounds worth of liability-driven investment funds (LDIs) experienced a panic that was caused due to plunging in the market. These funds are mostly dependent on pension funds.
Moreover, The Bank of England staff has worked through the night to prevent the liability-driven investment funds from collapsing. The bank said, “the pension funds were hours from a disaster before it intervened”.
Also, read: Bank of England issues statement to increase interest rates
Owner of Liability-driven Investment Funds
Many LDIs are owned by the salaried class which guaranteed them annual income for life long after retirement. Additionally, The Bank was informed by the LDIs managers that the funds are falling into negative net asset value which might lead to a severe crisis in England.
Eventually, a large number of gilts were sold and held collateral by the banks which are lent by the LDIs. As a result, The Bank has taken emergency monetary measures to purchase long-dated bonds for weeks. It has also delayed the selling of gilt bonds in the market.
This monetary move will save the England economy from a severe downfall, especially when the UK is already having inflation swamps and fears in the financial markets.
Furthermore, England’s economy was jolting into economic recession, with inflation revolving around 10% and a monetary rate is about 3.5%. Additionally, the investors are expecting a 5.75% of interest rate in November. Moreover, the bond’s value was falling to its lowest value.
Thus, the Bank of England has intervened as a parachute for the falling economy of the UK.
