The Bank of England made a surprise intervention today when it stepped in to stabilise market liquidity by increasing its government bond purchase to a potentially unlimited amount.

To steady the gilt market the Bank will carry out a temporary purchases of government bonds from today to an unlimited amount, backed by the UK Treasury.

The Bank said in a statement: “In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

The Bank added: “The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.”

The Bank is monitoring developments in financial markets closely today in light of the significant repricing of UK and global financial assets.

The Bank said the repricing had become more significant in the past day and was “particularly affecting” long-dated UK government debt. 

Because of concern this might worsen and undermine UK financial stability and reduce credit flow the Bank is intervening. 

The Bank of England’s Financial Policy Committee noted today that there were risks to UK financial stability from “dysfunction” in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace, the Bank of England said.

The purchases are intended to tackle a specific problem in the long-dated government bond market and auctions will take place from today until 14 October. 

The Bank added: “The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.”

The Bank added that its Monetary Policy Committee which sets interest rates “will not hesitate” to change interest rates by as much as needed to return inflation to the 2% target in the medium term. The next meeting of the MPC is scheduled for November.

The Bank said the MPC’s annual target of an £80bn stock reduction is unaffected and unchanged by today’s announcement but in light of current market conditions, the Bank’s executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and continue thereafter.

The Bank will shortly publish a market notice outlining operational details, it said.

Stuart Clark, portfolio manager at Quilter, said: “We have just seen the Bank of England (BoE) intervene in the gilt market today to try and calm the situation and this should provide some reassurance to the market. However, the BoE is trying to slow down all the plates spinning in the air without letting any fall and the Treasury during the “mini-budget” on Friday threw a bunch of marbles onto the floor to make it more challenging. 

“By instigating targeted, controlled and (apparently) time limited intervention the BoE will try to support the economy in order to avoid a more expensive bailout if conditions continue to materially deteriorate while maintaining independence. Above all we need to see the government regain credibility with domestic and international investors and explain how they plan to pay for these tax cuts other than just through borrowing.”

Donald Phillips, co-head of the Liontrust Global Fixed Income Team, said: "Clearly there has been a vertical climb in UK government bond yields and the opposite in the value of the pound since UK Chancellor Kwasi Kwarteng’s (not so) mini budget last week. The impacts of this run were being felt acutely across financial markets.

"Today, the Bank of England announced a “strictly time limited” buying programme to shore up the market in longer-dated bonds, designed, we assume, in particular to stop the damage being done to pensions by the violent increase in long-dated bond yields. The Bank has also announced a postponement in bond sales until the end of October, designed to help improve the balance in  the UK government debt market. 

"This is a welcome piece of news in the short term, preventing for now a run on the gilt market. Ultimately, whilst inflation remains a problem, quantitative easing (QE), is unlikely to be anything other than a very short-term fix. Indeed, the Bank is clear that quantitative tightening (QT) will recommence at the end of October.  We hope this is buying the UK government time to address the flaws in their profligate fiscal policies, affording them some room to bring to parliament a plan based on the reality of the economy we have. Failure to address their fiscal plan, we believe, will likely lead to more pain in government bonds down the line."