On October 10th, it became known that the Bank of England was preparing to take additional measures aimed at supporting pension funds harmed by a steep fall in UK government bond prices.
In late September 2022, the central bank, which set up a £65 billion ($72 billion) liquidity facility to keep the bond market functioning, announced it would increase the daily limit for auctions. Notably, it has bought bonds on those market floors for the last two weeks.
The financial institution used to spare its purchases, buying only £5 billion out of a possible maximum of £40 billion. Such purchases increase the United Kingdom’s money supply and make it impossible for inflation to slow down. The country’s inflation rate is currently as high as 10%.
In addition, the regulator wanted to introduce a new mechanism to the current emergency system that would lend sufficient liquidity to the market rather than just create it through bond purchases.
This would become an additional option to those currently available. This way institutions in need of liquidity would gain access to it. The Temporary Expanded Collateral Repo Facility (TECRF) would widen the collateral that banks use to access the central bank’s funds.
Banks' demand for liquidity has grown sharply as many pension funds have had to raise collateral against the derivatives they hold as part of the so-called "liability-driven investment" (LDI) strategies.
Many experts see the LDI as the most popular and low-risk way to increase returns for the United Kingdom’s pension funds. They became widespread when Chancellor of the Exchequer Kwasi Kwarteng’s actions triggered a fall in the pound and bonds. Forex strategists assume that the LDI would operate more resiliently in the future.
