Pound: John Redwood discusses role of Bank of England
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Amid market turmoil, the Bank of England has been forced to step in with support designed to help pension funds. Andrew Bailey, the governor of the central bank, stepped in to offer an emergency 13-day bond buying programme.
Andrew Bailey, the governor of the central bank, stepped in to offer an emergency 13-day bond buying programme.
The measure was designed to stave off “dysfunction” in the pension market following the announcements made in the mini-Budget.
However, buying Government bonds works directly against the Bank of England’s primary goal: to keep inflation down.
Consequently, Mr Bailey offered a warning this form of support would expire by today – Friday, October 14.
While the bank has pledged support will extend beyond today in other ways, it has made the markets, as well as pension savers, jittery.
It is not yet clear whether the bank will make good on its promise to walk away from this form of support, with an expert suggesting it is in a “bind” about what to do next.
The Chancellor of the Exchequer, Kwasi Kwarteng has cut short a visit to Washington DC to return to the UK.
The Government is facing calls to change its mini-Budget plan in attempts to calm the markets once again.
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Ed Monk at Fidelity International has warned the “high-stakes poker game” is set to reach a “crunch point” today.
But what could this mean for pension savers?
Mr Monk explained the outcome will depend on the type of pension a person is saving into.
He said: “If you are in a final salary pension scheme, it is for the trustees and managers of the fund to navigate the short run uncertainty and meet their obligation to pay your pension.
“The good news is that higher interest rates should help pensions meet their liabilities in the long run.
“If you are in a defined contribution pension scheme, the value of your pot will reflect the proportion of your fund which has been invested in Government bonds, the price of which has been affected by recent movements in yields.
“But remember, interest rates and bond yields can go down as well as up.”
There will still be some individuals who are saving into a pension pot in preparation for their eventual retirement.
Experts generally suggest it is not good to panic if the market starts to look challenging.
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Knee-jerk reactions can often prove more harmful than worthwhile, and may actually end up losing someone money.
Indeed, Mr Monk explained “uncertainty can create opportunities” and the future may be better than the present.
He added: “For the first time in many years, investors in bonds can now lock in a relatively high income and look forward to the possibility of a capital gain too if central banks pivot to easier monetary policy in the face of a possible recession ahead.”
This week, the Bank of England warned of a “material risk to UK financial stability”.
However, Deputy Prime Minister Therese Coffey told Sky News, Britons should “be assured” the finances of the country are safe.
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