The Bank of England has stated that it will intervene to calm markets after the government's tax-cutting plans prompted the pound to weaken and borrowing costs to rise.
It warned that ongoing market volatility would pose a "material danger to UK financial stability."
To help restore "orderly market circumstances," the Bank would begin buying government bonds at an "urgent pace."
Following the news, the pound fell to $1.0586, down 1.4% against the dollar.
It comes after the currency hit a record low on Monday following the chancellor's mini-budget, which vowed $45 billion in tax cuts supported by borrowing as part of an economic growth strategy.
Due to concerns about the plan's viability, investors have demanded substantially higher interest rates to lend to the government through Treasury bonds or "gilts." However, the Bank now intends to cut these prices by acting as a buyer.
Following the bank's intervention, gilt yields fell again.
The Bank has already stated that it will "not hesitate" to raise interest rates to safeguard the pound and contain rising costs. Some economists believe the Bank of England will hike interest rates from 2.25% to 5.8% by next spring.
Hundreds of mortgage products have been pulled from the market as a result of the estimate. There are also fears that the market turbulence would affect pension funds, which frequently invest in government bonds.
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To assuage investor fears, the Bank stated the bond purchases would be "time-restricted" and carried out on "whatever scale is appropriate."
It will also delay the launch of a gilt sale program, which was only announced last week.
Capital Economics senior UK economist, Paul Dales, said the Bank was compelled to intervene to avoid the early stages of a financial crisis and warned that concerns about the economy's prospects were mounting.
"This demonstrates that the Bank will do all possible to avoid a financial crisis, and it is already working." While this is excellent, the fact that it was required in the first place indicates that the UK markets are in jeopardy.
"It wouldn't be surprising if another problem in the financial markets arose soon."
Despite the Bank's intervention, the pound has continued to plummet, with some analysts predicting that it will soon approach parity with the dollar.
"What today demonstrates is that the market does not regard this as a problem that the Bank of England alone can solve," she said. "This is firefighting," said Jane Foley, a Rabobank currency strategist.
She stated that the government was under increasing pressure to disclose the financial implications of its tax cuts and expenditure plans.
The government's plan has been widely criticized, with the International Monetary Fund warning on Tuesday that the measures are likely to exacerbate the cost-of-living crisis and deepen inequality.
The administration has stated that it will not rescind the tax cuts but has vowed to unveil additional ideas to stimulate the economy and decrease public debt on November 23.
The Treasury admitted in a statement that global financial markets have suffered "substantial volatility" in recent days.
It stated that Chancellor Kwasi Kwarteng is "dedicated" to the Bank's independence and that "the government will continue to work closely with the Bank in support of its financial stability and inflation objectives."
However, Labour demanded that the chancellor outline his plans to stabilize the economy as soon as possible.
According to shadow chancellor Rachel Reeves, people will be "very concerned" about the cost of their mortgage, pensions, and living expenses.
"The Chancellor must make an urgent announcement outlining how he intends to address the problem he has created."
This is a massive display of power from the Bank of England in an attempt to calm borrowing markets. It does pose some concerns.
It emphasizes that this is a crisis, and the Bank has acted in an emergency mode. The evident source of this crisis was the chancellor's mini-budget, which resulted in a loss of market confidence and spiraling borrowing rates on government debt, which might represent a " danger to financial stability," according to the report.
As a result, it will now buy up those loans in infinite numbers for a limited time. In these markets, the effective interest rate charged to the UK government was reaching 20-year highs. That has now been reversed.
However, the decision was not taken by the Bank's Monetary Policy Committee, who were notified of it after it was made by the Bank's financial specialists. It appears that the Committee was planning to implement the exact opposite policy - selling government debts. The procedure was supposed to begin next week but has been postponed.
It is a major intervention, but it may cause market confusion regarding the clarity of policymaking and accountability boundaries. Sterling has dropped significantly yet again, approaching all-time lows. This is not going to address the government's problems. This may buy them some time.