Nicolò Bandera and Jacob Stevens

How should the central bank conduct asset purchases to restore market functioning without causing higher inflation? The Bank of England was faced with this question during the 2022 gilt crisis, when it undertook gilt purchases on financial stability grounds while inflation was above 10%. These financial stability asset purchases could have counteracted the monetary policy stance by easing financial conditions at a time when monetary policy was tightening them. Did a trade-off between price and financial stability arise? In our Staff Working Paper, we find the asset purchases stabilised gilt markets without materially affecting the monetary policy stance. This was only possible because the intervention was temporary; highly persistent asset purchases would have created tension between price and financial stability.