Bank of England reassures over exit of bond-buying programme                  

Britain's credit outlook lowered to negative by Fitch, citing risk that new growth plan could increase fiscal deficit

The Bank of England waded into Britain's €2.4trn gilt market to stop panic selling of long-dated bonds.

The Bank of England will gauge the health of Britain's government bond market before it unwinds the emergency intervention it launched after the UK government's new economic plan sparked upheaval. 

It comes as Britain's credit outlook was lowered to negative from stable by Fitch Ratings, which cited risk that the UK government’s new growth plan could increase its fiscal deficit.

Fitch affirmed the UK’s rating at AA-, the fourth-highest level. Britain’s most radical package of tax cuts since 1972, combined with plans for large-scale borrowing, sent UK markets into a tailspin last week, with the pound hitting the lowest-ever level against the dollar, while borrowing costs soared. 

S&P Global Ratings last week also lowered the UK’s outlook because of risks to the nation’s fiscal health. Moody’s rates the debt at AA3, the fourth-highest level, while S&P rates it AA, the third-highest grade. Moody’s also warned the UK government that the new mini-budget risks doing lasting damage to its debt affordability.

The Bank of England waded into Britain's £2.1 trillion (€2.4trn) gilt market last week to stop panic selling of long-dated bonds in the aftermath of chancellor Kwasi Kwarteng's mini-budget announcement. 

Mr Kwarteng announced £45bn of unfunded tax cuts in the statement, alongside large energy subsidies and other measures aimed at boosting growth, but financial markets baulked at the extra borrowing.

UK chancellor Kwasi Kwarteng announced £45bn of unfunded tax cuts but financial markets baulked at the extra borrowing.

"Once the purchase programme is complete, the operation will be unwound in a smooth and orderly fashion once risks to market functioning are judged by the bank to have subsided," Bank of England deputy governor Jon Cunliffe said in a letter sent to the House of Commons treasury committee.

"The approach to unwind will depend, among other things, on the scale of actual purchases, the market conditions during those purchases, and the market conditions when the purchases end," he wrote.

The letter was in response to questions from the treasury committee chair Mel Stride seeking explanation on why the Bank of England took the "unusual" step to intervene, and what potential implications the intervention could have for monetary policy.

Mr Cunliffe's letter spelt out how markets reacted swiftly to Mr Kwarteng's fiscal statement, with gilt prices suffering far steeper declines than other countries' bonds, at odds with the UK government's explanation that global factors were behind the moves.

On September 28, the Bank of England launched a programme to potentially buy up to £65bn of gilts with a maturity of at least 20 years in a series of daily operations.

It also delayed the start of a scheme to sell down £838bn of government bond holdings built up after the global financial crisis and during the pandemic. So far, the Bank of England has purchased less than £3.7bn of gilts in its new programme. 

Reuters and Bloomberg