Pound falls as Bank of England promises to end emergency gilt purchases on Friday

The Bank of England has said its scheme to protect the market from the chaos in the wake of the Chancellor’s mini-budget will come to an end on Friday.

Pension funds will have to have found tens of billions of pounds before the end of the week to ensure they have enough cash on hand to withstand market volatility.

The Bank wants to ensure that pension funds have a deadline for when they have to raise the tens of billions of pounds required to ensure they are resilient to market movements after Friday. So far it has spent nowhere near the £65 billion that it had set aside to potentially prop up markets, but purchases are expected to speed up later this week as the deadline approaches.

In a statement, the Bank said: “As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on October 14.

“The Governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior level.”

The announcement came after a report in the Financial Times on Wednesday claimed officials were telling lenders behind the scenes that the scheme might be extended past Friday.

The Bank had been forced to step in two weeks ago after the yield on gilts soared following Mr Kwarteng’s statement. Funds that many pensions invest in started needing cash as a result, so had to start selling their gilts but that fire sale caused prices to fall, which in turn forced them to sell even more.

“This led to a vicious spiral of collateral calls and forced gilt sales that risked leading to further market dysfunction, creating a material risk to UK financial stability,” the Bank’s Financial Policy Committee said on Wednesday.

The statement came a day after Bank governor Andrew Bailey spooked markets by saying the Bank would end its support of the gilt market on Friday as scheduled, prompting a sharp fall in the value of the pound.

Earlier, the Bank intervened for the second time in as many days to prevent “fire sales” of pension fund assets, amid the continuing market turmoil in the wake of Chancellor Kwasi Kwarteng’s mini-budget. But speaking later at an event in Washington, governor Andrew Bailey insisted that there could be no further extension to the government bond-buying programme beyond the end of the week.

He told an event in Washington that funds had “three days left” after a series of interventions to support the “dysfunctional” market, dashing investor hopes of the support being extended.

Mr Bailey said: “My message to the (pension) funds involved – you’ve got three days left now. You have got to get this done.

“Part of the essence of a financial stability intervention is that it is clearly temporary.”

Following his comments, sterling fell more than a cent against the dollar to its lowest rate since 29 September, dropping by 0.85% to 1.099 against the dollar.

The pound was lower against both the dollar and euro on Wednesday morning amid continued unease among financial traders. It came after the pound rose as high as 1.1180 on Tuesday but slumped sharply after the Governor’s warning to pensions funds.

Meanwhile, the FTSE 100 is expected to start marginally lower when trading opens, according to experts at CMC Markets UK.

Earlier, the Pensions and Lifetime Savings Association, representing the industry, welcomed the Bank’s latest intervention but warned against ending it “too soon”.

In a statement, it suggested it should be extended at least until 31 October, the date Mr Kwarteng is due to explain how he intends to get the public finances back on track following his £43 billion tax giveaway. Alternatively, it said “additional measures should be put in place to manage market volatility”.

The central bank warned that the sell-off in the UK gilt market poses a “material risk to UK financial stability” after yields on long-dated gilts soared once more on Monday, despite action by the Bank and government to try to allay investor concerns.

The action on Tuesday saw the Bank widen the scope of its UK government bond-buying programme to include purchases of index-linked gilts – a type of UK government bond that tracks inflation.

The Bank had already been buying up long-dated gilts, a type of government bond that make up a large proportion of pension pots, to steady the market.

On Monday, it doubled its daily bond-buying limit to £10 billion, while Mr Kwarteng brought forward his new fiscal plan and independent economic forecasts to 31 October in a bid to calm turbulent markets.

The Bank said: “The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”

It added that its latest efforts will “act as a further backstop to restore orderly market conditions”.