Bank of England forced to boost bond-buying scheme amid market turmoil

The Bank of England has said it will further expand its emergency bond-buying scheme, as it warned that an ongoing rout on government debt poses a risk to financial stability.

Traders have continued to dump bonds this week, pushing up the price of government borrowing and posing a “material risk to UK financial stability”, according to the central bank.

The Bank said on Tuesday morning it would now widen the scope of its bond-buying plan operations to include purchases of index-linked gilts in a bid to prevent a “fire sale”.

“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” it said. “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”

It comes as the Institute of Fiscal Studies (IFS) warned that the government would have to make £60bn of spending cuts to balance the books by 2026-27.

If Liz Truss and her chancellor Kwasi Kwarteng do not abandon their tax cut giveaways, they will have to make “painful” public sector cuts of 15 per cent to get debt under control, the IFS found.

But deputy prime minister Therese Coffey insisted on Tuesday that the UK’s public finances were still in a “good state”. Asked about the cuts ahead, she told Sky News: “I’m just not going to get into hypotheticals.”

Ms Coffey also denied that Mr Kwarteng had brought his medium-term fiscal plan forward from 23 November to 31 October because the markets were spooked.

Senior Tory MP Mel Stride, chair of the Treasury select committee, warned that that Mr Kwarteng may have to go further if he is to reassure jittery markets.

“The best option of all options is that what the chancellor comes forward with on 31 October does add up, the markets do have confidence in it, and we start to start to see a softening of these rising interest rates, the pressure on borrowing costs, mortgages and so on,” he told BBC Newsnight.

Mr Stride added: “And it is possible to do that, but it may require a huge amount of political courage on his part, possibly even to row back further on the tax cuts that have come forward.”

Tory MPs have told The Independent they would oppose major public sector spending cuts, following the IFS warning of a return to austerity to address the black hole in the public finances.

Kevin Hollinrake said: “A lot of MPs would have concerns if there were spending cuts impacting on frontline services, or making constituents worse off in terms of welfare. In terms of impacting of impacting on public services, as well as on welfare, spending cuts will be tremendously difficult to get through the House.”

One Rishi Sunak-supporting former minister told The Independent: “There is no way Tory MPs are going to stomach savage austerity in a post-Covid cost of living crisis. Liz has driven herself into a cul-de-sac.”

Ms Truss is facing mounting opposition within her own party over proposals not to increase benefits with inflation, a move that would amount to real-terms cuts for the most vulnerable.

Mr Kwarteng is set to answer questions from MPs about his fiscal plans in the Common today, with Treasury questions pencilled in for Tuesday afternoon.

Labour is calling on the chancellor to reverse course on the “kamikaze” tax-cutting mini-Budget. “It will be up to Labour to clean up the mess of the Conservatives once again,” said shadow chancellor Rachel Reeves.

The Bank of England announced on Monday that it will double the daily limit on its gilt-buying programme from £5bn to £10bn as it brings the scheme to an “orderly” close ahead of Friday’s cut-off.

Long-dated gilt prices tumbled, which sent yields on 30-year bonds soaring to 4.7 per cent on Monday – their highest level since the Bank of England was forced to step in last month in the wake of the mini-Budget.

The Bank said its latest efforts will “act as a further backstop to restore orderly market conditions”.