Bank of England takes drastic step to stabilise the economy | The Sun

THE Bank of England has announced drastic steps to help calm the markets after the Mini Budget led to a fall in the pound.

The Bank said it would buy government bonds on a temporary basis to help "restore orderly market conditions".

This process is known as quantitative easing. Its aim is to lower the Bank of England's interest rate and stimulate the economy.

It is an extraordinary intervention by the central bank to stabilise bond markets.

The interest rate on gilts – government bonds – has been rising over recent weeks and it spiked after the Mini Budget on Friday.

That made borrowing more expensive, but it also caused problems for financial institutions, particularly pension funds that use gilts as part of their investment portfolio.

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Add The Pound dropped to an all-time low of $1.03 against the dollar on Monday, but fell again this morning after the International Monetary Foundation called for a u-turn on tax cuts.

The Treasury responded by reaffirming its commitment to the Bank of England’s independence and said the Government "will continue to work closely with the Bank in support of its financial stability and inflation objectives.

A spokesperson said: "The Chancellor is committed to the Bank of England's independence."

It comes as Chancellor Kwasi Kwarteng has been stepping up efforts to reassure the City about his economic plans after the International Monetary Fund criticised the Government’s strategy – and as the pound suffered further falls on Wednesday.

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Britain's finance ministry said Bank of England intervention in the government bond market was needed to tackle "significant volatility" and market dysfunction, and any losses would be fully indemnified by the government.

The fall in the pound has led the Bank of England to warn Brits that it could raise interest rates to 6% next year.

A move which could see house prices crash by 15% – and lenders have already pulled over 900 fixed mortgage deals, according to MoneyFacts.

The decline in property prices is expected to result in the number of homes sold each year collapsing from 1.2million to just 800,00.

What is quantitative easing and how does it affect your money?

Quantitative easing is sometimes described as "printing money" but in fact no physical bank notes are created.

The Bank of England is temporarily buying government bonds, which is essentially government debt.

Buying bonds pushes up their price. When demand for anything increases, the price usually goes up.

That means that investors who had owned government debt – such as pension funds, banks and hedge funds – will get cash back from the bank in return for selling the bonds.

This should pump more money into the economy and lower interest rates.

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If bond prices go up, interest rates should go down making it easier for people to borrow money.

As bond prices have fallen on the back of the Bank of England's intervention today it should make borrowing cheaper for the government and households.

Quantitative easing has only happened twice before in recent history – during the financial crisis in 2009 when the Bank stepped in to restabilise the economy amid fears that lenders would run out of cash.

The second time was during the pandemic, when it expanded its quantitative easing by £450 billion to help the economy.

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