The pound faced renewed pressure in early trading in Asia on Wednesday after the Bank of England ruled out extending its £65bn bond-buying intervention into next week.
Andrew Bailey, governor of the BoE, said that market conditions in UK government bonds “seemed calmer” on Tuesday after the central bank staged a second emergency intervention in two days.
The pound initially edged lower on Wednesday, falling as much as 0.4 per cent against the dollar to $1.093 after dropping 0.8 per cent on Tuesday following Bailey’s remarks.
“We’ve announced we will be out by the end of this week. My message to the [pension] funds is you’ve got three days left,” Bailey said. He stressed that the central bank’s interventions were temporary measures to ensure financial stability and that a prolonged bond-buying programme would undermine the BoE’s goal of raising interest rates.
Bailey said that from Monday, UK pension funds would only have access to a short-term lending programme the BoE announced this week.
The announcement of a hard deadline for the bank’s bond-buying regime came after the BoE amended its original programme twice in as many days this week to act as a backstop for gilt markets, in which losses forced pension funds to dump assets.
“This is a gamble from the Bank of England,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore. He added that gilt markets faced a three-week window of uncertainty between the conclusion of the BoE programme and the government’s announcement of its fiscal plans at the end of the month.
“The market reaction clearly shows investors don’t feel that the pension funds are going to be able to rebalance their portfolios in time,” Mohi-uddin said. “It will be exactly the same thing next week — gilt yields rising, vicious selling, the pound down and more negative sentiment.”
Strains in the gilt market persisted on Tuesday as prices fell, pushing the yield on the 30-year UK government bond up as much as 0.14 percentage points to more than 4.8 per cent — the highest level since the BoE began its emergency intervention last month.
“There are plenty of jitters,” said Sean Callow, a senior strategist at Westpac. “A lot of what unnerved markets was the phrasing — the deadline, you’ve got three days, giving this impression that the Bank of England is determined to hold fast to its timetable and is willing to watch things crumble around it.
“Certainly markets are going to be very jittery into the end of this week and early next.”