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Bank of England's Brexit plan to prop up the economy with QE fails on second day

Central bank £52m short of target to buy £1 billion in long-dated government debt

Published 10/08/2016

Governor of the Bank of England Mark Carney
Governor of the Bank of England Mark Carney

The Bank of England plan to boost the economy with quantitative easing after Brexit has ran into trouble on its second day after it failed to find enough sellers of bonds.

The central bank was £52 million short of its target to buy £1 billion in long-dated government debt, pushing bond yields to record lows.

Pension funds and insurance companies were behind the missed target as they hung on to Government bonds, or gilts, which are seen as a safe haven asset in times of economic uncertainty.

Ros Altmann, the former pensions minister, said that low yields forces pension funds to hold more debt.

"It's a vicious circle," Baroness Altmann told the BBC.

"The lower gilt yields go the bigger pension deficits become, and that leads to them being told that they need to cut risks and told to increase the long term bonds that they hold."

The bond buying programme was announced by the Bank of England as part of a bumper package of stimulus measures amid grim predictions for the UK economy after the result of the EU referendum.

The central bank forecasted that the UK economy would return to a recession for the first time since the financial crisis unless it took drastic measures.

Even after cutting interest rates to records lows of 0.25 per cent and billions in stimulus, economic growth is expected to slump to just 0.1 per cent in the third and fourth quarters of the year.

Investors rushed to sell 3-7 government bonds to the Bank of England on Monday as gains in that part of the curve are already limited because of yields close to zero.

Darren Bustin, head of derivatives at Royal London Asset Management, said that the government may need to look at fiscal policies such as cutting VAT to prop up the economy if monetary stimulus fails.

"As quantitive easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution," he said.

The bond-buying programme will continue on Wednesday, the Bank of England said, despite the stumbling block.

"The Bank will incorporate the £52 million shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme.

"As set out in the Market Notice of 4 August 2016, details of these purchases will be announced on 3 November 2016," it said in a statement.

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