This is an extraordinary moment.
We’ll get to the details in a moment but before we do let’s not lose sight of the big picture.
The Bank of England has just stepped in to fix a part of the financial market which had broken following the government’s mini-budget last Friday.
It has intervened – not with interest rate hikes but with an emergency financial stability operation – because part of the foundations for the economy had begun to malfunction.
I cannot remember another occasion like it.
We had interventions during the financial crash, but they were reactions to genuinely global movements. In this case, the UK’s is the only market seeing a breakdown quite like this.
In this case the intervention was a direct reaction to UK economic policy. If the International Monetary Fund’s statement last night seemed chastening, then this is a level up.
Now the details (in brief).
Much of Britain’s financial markets rely on buying and selling of normally dull government bonds to manage risk over the long run.
This is part of the plumbing which allows money to flow from savers to borrowers. And it’s especially important for the pensions industry, where funds are especially reliant on long dated bonds (those dated over 20 years).
Those bond yields spiked at an unprecedented rate after the government’s announcements on Friday, sparking real problems for these so-called “liability driven investors”.
It’s a complicated and obscure part of the market, but it was getting close to a serious collapse. So the Bank has stepped in to buy those long-dated bonds and try to get it functioning again.
That might sound a lot like quantitative easing, but there are important (if ostensibly subtle) differences. QE was a pretty open-ended plan to boost the economy by getting cash flowing into people’s pockets.
This is a very specific (and time-limited, only two weeks) operation forensically focused on a few gummed-up categories of bonds.
Even so, there is a paradox here. Even as the Bank was in the process of trying to withdraw cash from the market, selling off the assets it bought in recent years as part of that QE scheme, it has been forced to do something which, at least to some extent, pushes in the opposite direction.
It has also been forced to pause its plan to reverse QE until October – though that may be the first of a number of pauses if the current instability persists.
Either way, this is a big moment. The Bank’s statement on Monday was unusual. The IMF’s statement on Tuesday was even more unusual.
Today’s intervention is nearly unheard of. For it to be a direct response to UK government policy is nearly unthinkable.