Bank acts to stop crisis rippling out

What are Government bonds?

Also known as gilts, they are one of the ways the Government borrows money. They are a promise to pay interest plus a rate of return – the yield – over a set time.

What did the Bank of England do?

Immediately start buying “long dated” UK Government bonds that mature in 20 years or more.

But why now?

To try to stem a spiralling crisis that threatened to engulf other parts of the financial system. Creditors to pension funds have been spooked by soaring interest rates and government debts and demanded their money back in a hurry.

To find the cash, pension funds have been selling bonds, one of the reasons yields - the rates - on them have leapt. The Bank feared, with a flood of bond selling, the rates could rocket even higher.

Why does that matter to me?

Firstly, because a mass of pension funds could have been left with assets worth less than their debt - ie they’d be insolvent.

Secondly, because pension funds with £1trillion invested in bonds are at the heart of the system. Thirdly, bond rates influence everything from government borrowing costs to the cost of mortgages.

So is my pension safe?

The Bank has taken the heat off pension funds. In fact, higher rates for Government bonds have actually reduced the shortfall in defined pension schemes, and left many with a surplus. But recently there has been pressure for them to sell bonds very quickly.

What about getting a mortgage?

Given mortgage rates were rising sharply, this move allows the market to take a breather.

Will the Bank still hike rates?

Almost certainly. But one theory is that rates might not now reach the 6 per cent feared next year.