As we highlighted in our last update, the UK government presented its ‘mini budget’ in more detail last Friday.

The huge fiscal spending plans that were detailed sent the pound plummeting and UK government bond (Gilt) yields higher. Investors were concerned that, as the Office for Budget Responsibility had not provided its spending forecasts alongside the release of the budget (as the government did not want them too) that the spending was mostly unfunded.

This would mean huge amounts of debt through Gilt issuance would be required over time to fund all the spending increases that the new Chancellor set out. This would negatively impact the UK’s debt position and has therefore led to UK assets moving negatively in the short term.

The moves that occurred in the Gilt market were so severe that the Bank of England had to step in and announce that it would be enacting a Gilt buying programme as well as halting its quantitative tightening programme until the end of October. The reason the Bank of England stepped in was that 30-year Gilt yields rose so quickly that pension schemes found themselves in a severely negative position to fulfil their obligations to underlying investors. The pension schemes were selling down assets to cover their losses from the Gilt yields rising so much in such little time. If the Bank of England had not enacted their Gilt buying programme, there could have been a major liquidity event across some of the larger pension schemes. Many pension schemes had to sell underlying Gilts which sent prices even lower and yields higher, exacerbating the problem further.

As a part of the Bank of England’s on-going remit is to keep financial stability in markets, they had to step in and enact the bond buying programme of purchasing long dated Gilts up to £5 billion on a daily basis. As soon as this was programme was announced, long dated Gilt prices rose and yields fell by over 1% providing the market and pension funds a sigh of relief.

The Bank of England is very keen that this programme will be a short-term fix to provide financial stability rather than reopening the Quantitative Easing programme that has been in place for the last few years. Markets are still expecting a significant rise in interest rates at the next monetary Policy committee meeting in November, highlighting that this is a short-term measure, and the Bank of England are not going to be derailed from their monetary tightening regime over the long term. Inflation is still clearly the focus point for the UK central bank as well as for central banks globally.

The tug of war between the Government and the Bank of England is still firmly in place. The Government may not be backing down, forcing the Bank of England’s hand, but it does seem this is a detour from the central banks road of monetary tightening, higher interest rates and lowering inflation over time. It will be interesting to see how the polarising actions of the Government and Central Bank continue to play out over time. Both will continue to be put under pressure from the other actions and so further changes to both policy regimes may occur over time.