BoE launches expanded repo facility as Kwarteng reveals date for Growth Plan
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Chancellor of the exchequer Kwasi Kwarteng will produce a full 'Growth Plan' on 31 October, assessed by the Office for Budget Responsibility, after his ‘Mini-Budget’ caused market mayhem last month. To stabilise markets, the Bank of England is now accepting corporate bonds as collateral in a new repo facility until 10 November.
The chancellor’s decision not to commission a forecast from the OBR has been one of a number of criticisms of his Mini-Budget on 23 September. The absence of independent scrutiny, coupled with large debt-funded tax cuts, led to a collapse in the value of the pound and UK government bonds, sparking a liquidity crisis in liability-driven investments that only ended when the Bank of England stepped in by offering to buy large quantities of gilts.
The Bank’s latest round of quantitative easing is temporary, and it has on Monday confirmed it will stop the exercise on Friday this week as planned, although it is increasing the size of purchases until then. There had been speculation about whether the Bank would need to extend its QE programme to avoid a repeat of the gilts market spin of late September which threatened to spill over into other asset classes as pension funds scrambled for cash.
In a key change, the central bank is now bringing in a new measure to ensure sufficient liquidity is in the system. The ‘Temporary Expanded Collateral Repo Facility’ will be in place for one month “in light of market conditions”, the Bank said. In this facility it is expanding the type of accepted collateral it will accept for repos to include investment grade corporate bonds.
“This facility will enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations, which will run beyond the end of this week,” it added.
The fees will be set at a flat rate of 15bps above the Bank Rate and will not increase with size of drawing.
The Bank of England’s Monetary Policy Committee is due to meet on 3 November to decide whether and by how much to rase the Bank Rate, with markets expecting a steep rise.
