Bank of England launches tool to calm gilt market in times of distress

LONDON (Reuters) -The Bank of England launched on Tuesday a new financial stability tool that insurers and pension funds can use during periods of turbulence in Britain's government bond market.

The Contingent Non-Bank Financial Institution Repo (CNRF) allows companies to borrow cash from the BoE using gilts they own as collateral.

Britain's 2.5-trillion-pound ($3.1 trillion) government bond market has been hit by volatility in recent years including the 2020 "dash for cash" as the COVID-19 pandemic spread and a 2022 selloff after former Prime Minister Liz Truss's "mini-budget".

"Opening for CNRF applications marks a significant step forward in our efforts to deal with future episodes of gilt market dysfunction," said Vicky Saporta, BoE executive director for markets.

The design of the plan was announced last year.

The BoE intervened in September 2022 to buy gilts as yields rocketed following Truss' plans for unfunded tax cuts, creating liquidity strains for liability-driven investment (LDI) funds used by pension funds.

LDI funds, pension funds and insurers are eligible to use the new repo facility, which the BoE will activate in times of dysfunction in the gilt market.

Use of the facility will be charged at a spread over the BoE's main interest rate, priced to be unattractive during normal times but attractive during times of market dysfunction.

Gilt yields also rose sharply this month, along with those of other major government bond markets but BoE officials have said the market functioned well on that occasion.

($1 = 0.8045 pounds)

(Reporting by Sachin Ravikumar, writing by Muvija M and Andy BruceEditing by William Schomberg)