To calm the panic in the financial markets, the Bank of England staged an emergency intervention on Wednesday following a drastic decline in the pound's value. For days, investors have been selling UK assets, threatening to crash the massive bond market and causing volatility in normally steady parts of the financial world.
As a result of the new government's so-called minibudget, the Bank of England will suspend its planned start of selling gilts next week and begin temporarily buying long-dated bonds.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” the Bank of England said, as reported by CNBC.
The Monetary Policy Committee’s target of an annual £80 billion ($85 billion) reduction of its gilt holdings remains unchanged, the bank said, with the first gilt sales — initially slated for Monday — now taking place on Oct. 31.
On the move, Uday Kotak, CEO of Kotak Mahindra Bank, tweeted that the Bank of England did an about turn and is buying Gilts.
Talking about the move's impact on the global market, Gary Schlossberg, Global Strategist, Wells Fargo Investment, told CNBC-TV18, “If it really began to unsettle the global markets, the Federal Reserve would have to take note. But at this point, the Fed remains focused on inflation. And staying with, we think that hawkish monetary policy, pointing toward a fairly aggressive move in November, and perhaps December.”
He further added that the driver for the Bank of England's action was to try to stave off instability. It was not an improvement fundamental. "So, with that view, yes, little has changed fundamentally, certainly for the United States and the rest of the global markets."
Antoine Bouvet, a senior rates strategist at ING, told CNBC that if the volatility in the gilt market persists, the Bank of England might need to prolong the bond purchases beyond the first two-week window, and another increase in interest rates was not ruled out.
'In India, there will be more of a growth recession'
The Indian economy growth is beginning to slow, said Schlossberg. “In India there will likely be a growth recession rather than an outright decline in GDP. I am not even sure I call it a growth recession, but certainly a winding down of economic growth that creates uncertainty in the market,” he said.
He advised investors to move into more defensive sectors, be less economically sensitive, and stay with the quality companies, larger companies, with healthy balance sheets to ride out.