OPINION: The Bank of England’s surprise decision to buy long-dated government bonds will ensure that the U.K. has a functional sovereign bond market and buy policy makers time to address economic challenges the country faces, KrishnaMemani writes.
The Bank of England’s surprise decision to intervene in the bond market by buying long-dated government bonds is a prudent move, not a sign of panic.
While the move does not solve the many economic challenges faced by the U.K., it buys policy makers time to address those challenges. The problem was further compounded by the structure of U.K. pension plans, which had hedged a lot of their interest-rate exposure. While the rise in rates did not change their funding positions, as they were hedged, it required them to provide huge amounts of collateral for their hedging positions.Faced with a combination of a dysfunctional sovereign debt market and the risk of financial instability, the BOE had to step in.