The Bank of England has said it will step in to calm markets after the government’s tax-cutting plans sparked a fall in the pound and caused borrowing costs to surge.
It warned that if the market volatility continued there would be a “material risk to UK financial stability”.
The Bank will start buying government bonds at an “urgent pace” to help restore “orderly market conditions”.
The pound tumbled to $1.0560 after the news, down 1.6% against the dollar.
It comes after the currency hit a record low on Monday following the chancellor’s mini-budget.
The Bank of England has already said it will “not hesitate” to hike interest rates to try and protect the pound and try and stem surging prices. Some economists have predicted the Bank of England will raise the interest rate from the current 2.25% to 5.8% by next spring.
The projection has pushed borrowing costs higher, leading hundreds of mortgage products to be taken off the market.
The Bank said the bond – or “gilt” – purchases would be “time limited” and carried out on “whatever scale is necessary” to ease investor concerns.
It will also postpone the planned start of a gilt sale programme that was only announced last week.
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Paul Dales, chief UK economist at Capital Economics, said the Bank had been forced to step in to avoid the early stages of a financial crisis and warned fears over the economic outlook were growing.
“This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working. While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position.
“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long. Either way, the downside risks to economic growth are growing.”
“The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided,” the Bank said in a statement.
Government bond yields – the effective cost of government borrowing – especially at longer borrowing durations, have spiked in the past few days as investors continue to worry about the UK economy.
It comes after the government pledged $45bn worth of tax cuts, funded by borrowing, as part of a plan to boost economic growth.