BofE gilt market interventions end; market reacts to Chancellor's statement

The Bank of England (BofE) has confirmed that the temporary purchase of long-dated UK government bonds ended as scheduled on 14 October, after enabling “a significant increase in the resilience of the sector”.

The BofE previously confirmed plans for targeted purchases in the gilt market in an effort to prevent a "self-reinforcing spiral", after gilt yields surged following the Chancellor's mini-Budget.

Although there was speculation that the support may be extended in some form, the BofE confirmed that it terminated these operations and ceased all bond purchases as scheduled on 14 October.

It also stated that “as intended, these operations have enabled a significant increase in the resilience of the sector”.

However, some additional measures from the BofE will still be available.

The Temporary Expanded Collateral Repo Facility, for instance, will remain available until its planned closing date of 10 November 2022.

BofE confirmed that banks will also have access to liquidity from the existing Indexed Long Term Repo facility, the Discount Window Facility (DWF); and a weekly US Dollar repo supported by international swap lines.

In addition to this, BofE makes available reserves via its Short-Term Repo facility each week, designed to ensure short term market rates remain close to bank rate.

Gilt yields have continued to fluctuate since the operations ended on Friday, with a sharp fall seen this morning (17 October). However, there are hopes that the latest emergency statement from the new Chancellor, Jeremy Hunt, will instil some calm in the gilt markets.

According to HM Treasury, the Chancellor met with the BofE Governor and the Head of the Debt Management Office last night (16 October) to brief them on his plans to bring forward measures from the Medium-Term Fiscal Plan, which are designed to support fiscal sustainability.

In today's (17 October) statement, the new Chancellor announced the reversal of a number of the policies announced in the 23 September mini-Budget, with the basic rate of income tax to remain at 20 per cent indefinitely, rather than be cut to 19 per cent from April 2023 as planned.

The Chancellor also scrapped changes to corporation tax, alcohol duty, reforms to off-payroll working rules, and cut the energy price guarantee from two years to six months, with the scheme to run until April 2023.

Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, said that the latest announcements “could help soothe markets and restore some level of calm”, highlighting this aim as “probably the most important part of today’s statements”.

Indeed, XPS Pensions Group investment partner, Adam Gillespie, says that the initial recent market to the latest announcement seems favourable overall, clarifying however, that this needs to be taken in context of the intra-day movements on Friday.

However, Gillespie argued that the past three weeks have “cast a long shadow over the pensions industry”, explaining that schemes may still have been detrimentally impacted.

In particular, he explained that given the marked rise and fall of yields, any lost hedging could have led to a cost for affected schemes, also noting that hedging is now more capital intensive, suggesting that there will be lower hedging levels across the industry as a result.

However, Janus Henderson Investors portfolio manager in the global bonds team, Bethany Payne, suggested that the latest announcement will give pension schemes “breathing space and more time” in the short-term, with the immediate impact expected to reduce the pressure to source further liquidity to meet collateral obligations.

“However, the sharp rise in gilt yields will have resulted in an improved funding position and a reduction in the expected time horizon to achieve the schemes’ long-term objective,” she added.

“This means trustees and their advisors will need to revisit their scheme’s asset allocations. The positive reaction to the Chancellor’s statement means trustees now have more time to complete this exercise over the coming weeks.”

The changes will also have an impact on pensions tax relief, as Morrissey explained that the decision to put off the cut in the basic rate of income tax indefinitely means pension savers will continue to benefit from 20 per cent pension tax relief for the foreseeable future.

“Instead of having to pay £81 to get £19 tax relief, savers will continue to get an extra £20 for every £80 they contribute to their pension - giving people a small, but important extra boost,” she explained.

This was echoed by AJ Bell head of retirement policy, Tom Selby, who added: “Today’s announcement takes us back to square one via an unbelievably traumatic route.

"Brits will pay more income tax than under the mini-Budget plans announced last month and therefore will get more pension tax relief than they would have if those plans had been taken forward."

The Chancellor is scheduled to deliver the full Medium-Term Fiscal Plan, alongside a forecast from the independent Office for Budget Responsibility, on 31 October.

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