Financial stability buy/sell tools: a gilt market case study

This article describes the Bank of England’s 2022 gilt market intervention to support UK financial stability. It outlines the principles underpinning the design of this intervention and considers how these were applied in practice. The growing role of market-based finance has led to increased discussion of central bank use of temporary asset buy/sell tools in order to protect financial stability in a stress, building on their role as ‘lenders of last resort’. Amid severe dysfunction in the UK government bond market in September 2022, when distressed forced selling of gilts by liability-driven investment (LDI) funds led to fire-sale dynamics, the Bank of England launched a temporary and targeted backstop gilt purchase facility. Once the risks to market dysfunction were judged to have subsided, the Bank sold these gilts in a timely but orderly way using a demand-led approach. While the detailed design of financial stability buy/sell tools will depend on the particular shock faced, this article sets out aspects of the Bank’s experience in the 2022 LDI episode that may have a wider application, and draws some lessons from them.