London Daily

Focus on the big picture.
Thursday, Apr 02, 2026

Bank of England steps in to calm markets

Bank of England steps in to calm markets

The Bank of England has said it will step in to calm markets after the government's tax-cutting plans sparked a fall in the pound and caused borrowing costs to surge.

It warned that if the market volatility continued there would be a "material risk to UK financial stability".

The Bank will start buying government bonds at an "urgent pace" to help restore "orderly market conditions".

The pound, which has been volatile, rose 1.4% against the dollar to $1.08.

It comes after the currency hit a record low on Monday following the chancellor's mini-budget, which pledged $45bn worth of tax cuts, funded by borrowing, as part of a plan to boost economic growth.

The government borrows money to fund its spending plans by selling bonds, or "gilts", to investors such as pension funds and big banks on international markets.

The investor then gets to receive a stream of future payments, or "yield", based on the interest rate the government has offered.

Due to concerns over whether the government's plan will work, investors have been demanding much higher interest rates to lend to the UK government. But the Bank now hopes to lower these prices by buying its bonds.

The government's long-term borrowing costs fell after the bank's intervention on Wednesday, although still remains high.


Pension pressure


The Bank of England was forced to intervene after the market turmoil put pressure on pension funds, which invest in government bonds because they are usually so stable.

So called Liability Driven Investment funds - which support defined benefit pensions schemes - were facing a collapse in the value of the bonds they hold, which in turn could have forced them to rush to sell other assets, sparking yet more market panic.

However, industry group the Pensions and Lifetime Savings Association (PLSA) said that "pension schemes are long-term investors and moments like this come from time to time".

"While this is a complex situation as there has been a lot of volatility in the gilt markets in recent days, we would not expect any significant issues for savers," said Joe Dabrowski, deputy director of the PLSA.

Nevertheless, he said there will be "some operational challenges and pressures on liquidity" in the short term.

Mr Dabrowski added that "this is not ideal, [but] they are challenges that can be overcome and the statement from the Bank of England is a helpful step to achieving that".

The Bank has already said it will "not hesitate" to hike interest rates to try and protect the pound and try and stem surging prices. Some economists have predicted the Bank of England will raise the interest rate from the current 2.25% to 5.8% by next spring.

The projection has led hundreds of mortgage products to be taken off the market.

The Bank said its bond purchases would be "time limited" and carried out on "whatever scale is necessary" to ease investor concerns.

It will also postpone the planned start of a gilt sale programme that was only announced last week.

Paul Dales, chief UK economist at Capital Economics, said the Bank had been forced to step in to avoid the early stages of a financial crisis and warned fears over the economic outlook were growing.

"This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working. While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position.

"It wouldn't be a huge surprise if another problem in the financial markets popped up before long."


Despite the Bank's action, the pound continued to fall with some analysts warning it could even reach parity with the dollar.

"What today shows us, is that the market doesn't see this as a problem that just the Bank of England can clean up," she said. "This is just firefighting," said Jane Foley, a currency strategist at Rabobank.

She said pressure was growing on the government to make clear the financial cost of its tax cut and spending plans.

There has been widespread criticism of the government's plan, with International Monetary Fund warning on Tuesday that the measures are likely to fuel the cost-of-living crisis and increase inequality.

The government says it will not reverse its tax cuts, but has promised to release further plans to boost growth and reduce public debt on 23 November.

In a statement, the Treasury acknowledged global financial markets had seen "significant volatility" in recent days.

It said Chancellor Kwasi Kwarteng was "committed" to the Bank's independence, adding: "The government will continue to work closely with the Bank in support of its financial stability and inflation objectives."

But Labour called on the chancellor to urgently clarify how he planned to stabilise the economy.

Shadow chancellor Rachel Reeves said people would be "deeply worried" about the cost of their mortgage, about their pensions, and the cost of living.

"The Chancellor must make an urgent statement on how he is going to fix the crisis that he has made."

Newsletter

Related Articles

0:00
0:00
Close
Trump’s Strategic Pressure on UK Seen as Push for Stronger Alignment and Fairer Terms
UK Focuses on Trade Finance to Secure Critical Materials for Defence and Energy Sectors
Majority of UK Businesses Hit by Middle East Conflict While Confidence Holds Firm
UK Royal Navy Faces Renewed Scrutiny as Debate Intensifies Over Capability and Readiness
Reform UK Faces Mounting Distractions as Policy Agenda Struggles to Gain Traction
Investigation Launched Into Northern Cyprus IVF Clinics After UK Families Receive Incorrect Sperm
International Meeting Issues Unified Call to Safeguard Navigation Through Strait of Hormuz
Potential Strait of Hormuz Closure Raises Concerns Over UK Food and Medicine Supply Chains
UK Leads Coalition of Over Forty Nations Urging Iran to Reopen Strait of Hormuz
UK Secures Tariff-Free Access for Medicines in Landmark US Pharma Trade Agreement
King Charles III Invited to Address Joint Session of U.S. Congress in Rare Diplomatic Honor
Debate Grows Over Whether Expanded North Sea Drilling Can Reduce UK Energy Bills
UK Faces Heightened Risk of Jet Fuel Shortages, Airline Chief Warns
UK Ends Police Investigations into Lawful Social Media Posts After Review Finds Overreach
Abramovich Moves to Establish Charity for Frozen Chelsea Sale Proceeds Amid UK Dispute
Starmer Reaffirms NATO Commitment While Responding to Trump’s Strategic Critique
UK Aid Reductions Raise Fears of Severe Human Impact Across Parts of Africa
UK Signals Renewed Push for EU Cooperation as Iran Conflict Reshapes Security Landscape
Bank of England Signals Caution as Bailey Advises Markets Against Expecting Rate Hikes
UK to Convene Global Coalition to Restore Shipping Through Strait of Hormuz
Trump Signals Possible NATO Reassessment, Emphasizes Stronger U.S. Strategic Autonomy
Australia Joins British-Led Efforts to Reopen Strait of Hormuz Amid Escalating Tensions
King Charles Plans US State Visit as UK Strengthens Ties with Trump Leadership
UK Regulator Launches Investigation Into Microsoft’s Business Software Practices
Kanye West Set for High-Profile Return to UK Stage at Wireless Festival
Trump Presses Europe to Strengthen Commitment as Iran Conflict Escalates
UK to Deploy Additional Troops to Middle East Amid Rising Regional Tensions
UK Authorities Face Claims of Heavy-Handed Measures in Monitoring Released Pro-Palestine Activists
Trump Calls on UK to Secure Its Own Energy as Iran Conflict Intensifies
Nigel Farage Declines Invitation to UK Conservative Conference Led by Liz Truss
Trump Warns Allies to Take Responsibility as Rift Deepens with UK and France Over Iran Conflict
How Britain’s Prime Minister Controls U.S. Bomber Access in Escalating Iran Conflict
Trump Urges Allies to Secure Their Own Oil Supplies as Hormuz Crisis Disrupts Global Energy
Russia Expels British Diplomat as UK Pushes Back Against Pressure
White House App Faces Scrutiny After Claims of Continuous User Location Tracking
BBC Faces Scrutiny Over Allegations of Paid Content Linked to Saudi Arabia
UK-France Coastal Patrol Agreement Nears Breakdown Amid Migration Pressures
UK Police Detain Pro-Palestine Activist Again Weeks After Bail Release
FTSE 100 Advances as Energy and Mining Shares Gain Amid Middle East Tensions
Eli Lilly Seeks UK Pricing Deal to Unlock Renewed Pharmaceutical Investment
Three Arrested in UK After Massive Cocaine Haul Discovered Hidden in Banana Shipment
UK Fuel Prices Poised for Further Surge Amid Global Energy Pressures
Apple Subsidiary Penalized by UK Authorities for Breach of Moscow Sanctions
Western Allies Intensify Coordinated Sanctions Strategy Against Russia
UK Lawmakers Face Criticism Over Renewed Push for Social Media Restrictions
Starmer Signals UK Crackdown on Addictive Social Media Features
Rising Costs Push One in Five UK Hospitality Businesses to the Brink of Closure
Man Arrested on Suspicion of Attempted Murder After Car Strikes Pedestrians in UK, Injuring Seven
Escalating Conflict Involving Iran Tightens Fiscal Pressures and Highlights UK Economic Vulnerabilities
UK Moves to Confront Russian ‘Shadow Fleet’ Operating in Its Waters
×