2022 Gilt Market Crisis

How should the Bank of England respond to a severe market disruption in the gilt market?

In September 2022, following the announcement of a controversial fiscal package, gilt yields surged.  This placed devastating pressure on UK’s pension funds, particularly those employing Liability-Driven Investment (LDI) strategies. Many pension funds faced a liquidity crisis due to rising collateral requirements. As funds raced to meet their obligations, they sold gilts into the market further increasing yields, setting off a systemic crisis.

Prior to the gilt market disruption, the Bank of England had been dealing with soaring inflation by raising Bank Rate and planning to repurchase gilts. However, these monetary measures seemed to be in conflict with dealing with the crisis in the gilt market. And yet, the bank was charged with ensuring stability in both prices and the financial market. How could the Bank of England maintain its credibility in trying to curb inflation at the same time it was easing a systemic threat to the financial markets?