The Bank of England has waded in to rescue the UK market for a second time in recent weeks, by buying “index-linked gilts”.
This is yet another term which is being used more and more due to the country’s ongoing economic crisis – but what does it actually mean?
Here’s what you need to know.
What is a gilt?
A gilt is another term for a government bond and a bond is a very secure form of investment.
They’re sold by governments or corporations when they’re looking to make money.
The market value of the bond changes over time according to how many investors are interested in it.
This is not the same as buying stocks in a company, as bonds don’t give you a share of ownership.
Instead, it’s a loan from the investor, who buys the bond, to the company (in this case, the government) who issued the bond.
Government bonds are seen as a particularly safe form of investment because they are more likely to be paid on time, and so are seen as higher-quality with a lower interest rates.
The term “gilt” or “gilt-edged security” is used to describe government bonds because of how secure they are. The UK government has never failed to make interest or principal payments on gilts.
The government’s debt management office (DMO) also defines a gilt as: “A UK government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange.”
What is an “index linked” gilt?
These are different to regular gilts because both the first payment and the semi-annual coupon payments (a fixed payment every six months) move in line with the General Index of Retail Prices.
This is otherwise known as the RPI and is one measure of inflation rates, although not the most commonly used one. The Office For National Statistics, for instance, mostly uses Consumer Price Index (CPI) when producing its monthly figures.
Essentially, these are the government bonds which increase in value during periods of inflation.
So, what does this have to do with the economy now?
The Bank of England will be buying index-linked gilts from October 11 to October 14, “alongside the Bank’s existing daily conventional gilt purchase auctions”.
The Bank believes there is a “material risk” to financial stability, and so buying up to £5 billion of index-linked debt each day for four days could help keep the UK market afloat.
Essentially, buyers stopped purchasing the government’s bonds after Kwasi Kwarteng unveiled his mini-budget last month, which contained £45 billion of unfunded tax cuts.
The huge announcement spooked the market (causing the pound to plummet in value) and led to a £2.1 trillion sell-off in government bonds.
