United Kingdom
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Institutional framework
The 1998 Bank of England Act states that, in relation to monetary policy, the Bank of England's objectives shall be "to maintain price stability, and subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment." The Government is required to specify its definition of price stability and its economic policy objectives at least once every 12 months. The current definition of price stability is an inflation target of 2% as measured by the 12-month increase in the Consumer Prices Index (CPI). The Monetary Policy Committee's (MPC) remit reflects the government's economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy.
Within the Bank of England, the MPC has responsibility for formulating monetary policy in order to meet the Bank of England's objectives. The MPC meets at least 8 times per year. Decisions are taken by a vote by the members present at the meeting. A statement and minutes are published as soon as reasonably practicable after each meeting. The Bank of England is then responsible for using its monetary policy implementation framework (described in detail on its website) to implement the decisions of the MPC.
Key features of the monetary policy implementation framework
The Bank of England's monetary policy implementation framework provides the MPC with a number of tools which it can use in order to meet its objectives, including: setting Bank Rate; undertaking asset purchases; supplying central bank reserves; and providing forward guidance on the future expected path of monetary policy.
Monetary policy is primarily implemented through the setting of Bank Rate, which is the interest rate paid on reserves accounts held at the Bank by eligible firms. The Bank currently implements the MPC's decisions on Bank Rate using a 'floor system', in which almost all reserves held with the Bank are remunerated at Bank Rate. This floor system was introduced in 2009, when the MPC decided to start making large-scale asset purchases. This system keeps wholesale market interest rates close to Bank Rate, because if wholesale rates fell significantly below this level, then eligible firms could borrow reserves in the market and earn Bank Rate by depositing them at the Bank of England. A key merit of this 'floor' system is its ability to keep overnight interest rates close to Bank Rate in the event of large changes in the supply of, or demand for, reserves.
Another feature of the framework is that the Bank need not set reserve requirements. This is in contrast to the Bank's pre-2009 regime, where reserve targets were set by SMF participants themselves. This framework and the various operations used to supply and drain participants' reserves were largely ceased in 2009.
Very short term liquidity needs are met through the Bank's Operational Standing Facilities (OSFs), which allow participating firms to borrow reserves directly from the Bank throughout each business day. The lending facility consists of an overnight lending transaction collateralised against high-quality, highly-liquid assets, for which participants are required to pay a 25 basis point premium (0.25%) above Bank Rate.
Unconventional monetary policy measures
In response to the 2008 financial crisis the MPC began a large-scale purchase of financial assets which, at the time, consisted mostly of UK government bonds. 1 These asset purchases were carried out by a Government-indemnified subsidiary of the Bank - The Bank of England Asset Purchase Facility Fund Limited (BEAPFF). From March to November 2020, the MPC voted to increase the stock of UK government bonds, financed by the issuance of central bank reserves, by £440bn to respond to the severe economic and financial disruption caused by the spread of Covid-19. At its August 2021 meeting, the MPC voted to maintaining the target for the stock of UK government bond purchases at GBP 875 billion.
In August 2016 a corporate bond purchase scheme (CBPS) was launched. The scheme aimed to provide stimulus by lowering the yields on corporate bonds to reduce the cost of borrowing for companies; encourage asset sellers to rebalance portfolios; and encourage companies to issue more bonds. At its August 2021 meeting, the MPC voted to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at GBP 20 billion. The most recent increase in the stock of corporate bonds purchased was in 2020 in response to the severe economic and financial disruption caused by the spread of Covid-19. In line with a change to the MPC remit in March 2021, the Bank of England has set out to adjust CBPS to account for the climate impact of the issuers of the bonds it held.
Asset purchases under QE have meant that, over recent years, the Bank's balance sheet has become much larger than at any other time in recent history. In August 2021, the MPC set out guidance on how the balance sheet could reduce to deliver tighter policy. The MPC intends to begin to reduce the stock of purchased assets, by ceasing to reinvest maturing assets, when Bank Rate has risen to 0.5% and if appropriate given the economic circumstances. The MPC will consider actively selling some of the stock of purchased assets only once Bank Rate has risen to at least 1%. 2
On 11 March 2020 the Bank announced the introduction of a Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. This scheme offered participating banks four year funding at interest rates at, or very close to, Bank Rate. Taking its lead from the Term Funding Scheme (TFS) launched by the Bank in 2016, the TFSME was designed to: help reinforce the transmission of the reduction in Bank Rate; provide participants with a cost-effective funding backstop; and within that incentivise banks to provide credit to help firms bridge economic disruption. Accordingly, the amount of funding available would be dependent on participants' stock of real economy lending at the outset, plus their net lending over a reference period. The price would also be dependent on net lending. Unlike in the 2016 TFS, the lending incentive element of the TFSME was sharpened to encourage lending to smaller businesses, since evidence showed that disruptions to supply chains and weaker economic activity could pose the most acute challenges for these firms. The TFSME provides an additional five pounds of funding for every pound of positive net lending to SMEs.
Asset purchases under QE have meant that, over recent years, the Bank's balance sheet has become much larger than at any other time in recent history. In August 2021, the MPC set out guidance on how the balance sheet could reduce to deliver tighter policy. The MPC intends to begin to reduce the stock of purchased assets, by ceasing to reinvest maturing assets, when Bank Rate has risen to 0.5% and if appropriate given the economic circumstances. The MPC will consider actively selling some of the stock of purchased assets only once Bank Rate has risen to at least 1%. 2
Liquidity insurance and other operations
The Bank also offers a number of liquidity insurance operations which can supply central bank reserves. The operations include: Indexed Long Term Repos, which are currently weekly market-wide liquidity operations which provide central bank reserves for a 6-month term via a competitive auction process; the Contingent Term Repo Facility, which allows the Bank to provide liquidity against the full range of eligible collateral at any time, term, and price it chooses; and the Discount Window Facility, which is a bi-lateral, on demand facility where SMF participants can borrow highly liquid assets (gilts or, in certain circumstances, cash) in return for a wide range of collateral. The Contingent Term Repo Facility was launched for the first time in 2020, to help alleviate frictions observed in money markets as a result of the economic shock caused by the spread of Covid-19.
1
More details can be found here.
2
More detail can be found in the August 2021 Monetary Policy Report, Box A
Institutional setup of monetary policy decisions and operations
| Policy decision body, size and composition | Monetary Policy Committee |
|---|---|
| Major mandates 1 | Maintain price stability within the United Kingdom and subject to that, to support the economic policy of His Majesty’s Government including its objectives for growth and employment. |
| Decision-making process | Majority vote of MPC members |
| Frequency / length of meetings | 8 times a year, roughly 6–8 weeks apart |
| Frequency of announcements | Same |
| Main policy target | Bank Rate |
Overview of key features
| Key policy rate | Bank Rate |
|---|---|
| maturity (days) | 1 |
| Operating target | Short-term money market interest rates |
| maturity (days) | |
| Standing facilities | Collateralised lending, unsecured deposit |
| Corridor width (bp) | Currently 50 (Deposit: Policy rate less 25bps, Lend: Policy rate plus 25bps) |
| Reserve requirements | No. In an explanatory note published in August the Bank set out that it was minded to use a variant of the current floor system as the stock of purchased assets is reduced |
| maintenance period | Six to eight weeks |
| Main operation 2 | The Bank operates a weekly Short Term Repo (STR) facility designed to ensure banks have ready access to reserves at Bank Rate. For the STR: |
| functions | Provide market with central bank reserves |
| maturity (days) | 7 days |
| regular interval | 1 week |
| frequency | Weekly - alongside APF gilt sales |
| Overall frequency | For STR - weekly |
| Discretion left to operational desk | No discretion to desk. Unlimited size |
| Key policy signals via | |
| announcement | √ |
| keynote tender | |
| standing facility | |
| other |
Monetary policy communication
| Explicit use of forward guidance | Yes (introduced in August 2013) |
|---|---|
| Timing / media of policy announcement | 12 pm on day of MPC decision; central bank website. |
| Policy announcement and documents | MPC meeting summary and minutes |
| Explaining policy decisions | MPC meeting summary and minutes Quarterly Monetary Policy Report (MPR) and press conference |
| Dissemination of minutes (timing / media) | Yes / together with policy decision since August 2015; central bank website |
| Content of minutes | Description of economic and financial conditions and the policy consideration |
| Publication of forecasts 3 | Yes. Forecasts for GDP, unemployment and inflation contained in quarterly Inflation Report. Including fan charts of the probability of various outcomes for each indicator. |
| Publication of projected path of policy rate 4 | The path for Bank Rate implied by forward market interest rates is published in the quarterly Inflation Report. The curves are based on overnight index swap rates. |
Reserve requirements: ratios and size
| Main functions served | N/A |
|---|---|
| Domestic currency | N/A |
| Foreign currency | |
| Average | |
| Required reserves | N/A |
| Required reserve as % of GDP | N/A |
| Actual reserves | GBP 950.5bn 5 |
| Actual reserve as % of GDP | 43% 6 |
Main features of reserve requirements
| Averaging | N 7 |
|---|---|
| Carry-over | N 8 |
| Type | N/A |
| Maintenance period | Around six to eight weeks |
| end (day) | MPC-1 |
| Calculation period | Around six to eight weeks |
| end (day) | MPC-1 |
| Lag before maintenance | N/A |
| Vault cash | N |
| restrictions | |
| Remuneration | Y |
| average rate | Bank Rate |
| marginal rate | Bank Rate |
| Framework last changed | 03/09 |
Liquidity position and forecasting
| Structural Position | Surplus 9 |
|---|---|
| Most volatile factor(s) | Loan to APF and the TFSME 10 |
| Most unpredictable factor(s) | Accounts of UK government’s Debt Management Office and of other central banks |
| Forecast horizon(s) | 2 weeks |
| Frequency | Daily |
| Frequency of revision | Daily |
| Forecast published? | No |
Standing facilities: lending / market ceiling
| Name | Operational Standing Lending Facility |
|---|---|
| Form | Collateralised loan |
| Pricing method | Bank Rate + 25 bps |
| Maturity | O/N |
| Access limited by/to | Banks, building societies, CCPs and broker-dealers, unlimited size but only against eligible collateral 11 |
| Function(s) | Limits interest rate volatility; provides liquidity insurance against frictional payment shocks |
Standing facilities: deposit / market floor
| Name | Operational Standing Deposit Facility |
|---|---|
| Form | Deposit |
| Pricing method | Bank Rate minus 25 bp |
| Maturity | O/N |
| Access limited by/to | Banks, building societies, CCPs and broker-dealers, unlimited size 12 |
| Function(s) | Limits interest rate volatility; provides liquidity insurance against frictional payment shocks |
Open market operations: repo or reverse repo
| Name/Type 13 | (i) Indexed Long-Term Repos (ii) Contingent Term Repo Facility (iii) Short Term Repo Facility - contingent on confirmatory MPC vote on commencing APF gilt sales |
|---|---|
| Maturity | (i) 6 month (ii) Any term, as determined by BoE (iii) 1W |
| Frequency | (i) Weekly (ii) As needed (iii) Weekly |
| Pricing method | (i) & (ii) Uniform price auctions (iii) Indexed to Bank Rate |
| Access limited by/to | (i) & (ii) Banks, building societies and broker-dealers (iii) Sterling Monetary Framework and Open Market Operation Participants 14 |
| Function(s) | (i) Liquidity insurance (ii) Liquidity insurance (iii) Reserves management |
Open market operations: central bank bills
| Name | Bank of England bills |
|---|---|
| Total issuance | Not currently being issued |
| Maturity | 1 week |
| Restrictions on possible maturities | ≤1 week |
| Pricing method | Variable rate |
| Access limited by/to | Banks and active intermediaries |
| Discretion left to operational desk |
Open market operations: FX swaps
| Maturity | N/A |
|---|---|
| Frequency | N/A |
| Pricing method | N/A |
| Access limited by/to | N/A |
| Function(s) | N/A |
Other significant liquidity management means
| Name/Type 15 | (i) OT purchases of UK government bonds (QE) (ii) OT purchases of sterling corporate bonds (CBPS) (iii) DL Term Funding Scheme with additional incentives for SMEs (TFSME) |
|---|---|
| Form | |
| Frequency | (i) and (ii) As needed when mandated by Monetary Policy Committee (iii) Ongoing during the the drawdown window, now closed |
| Maturity | (i) Conventional Gilts with minimum residual maturity of greater than 3 years (ii) Minimum residual maturity of 12 months (iii) Four years (with up to 10 years to match the Government's Bounce Back Loan Scheme) |
| Pricing Method | (i) and (ii) Auction (iii) Indexed to Bank Rate |
| Access limited by/to | (i) Gilt-edged Market Makers (GEMMs) (ii) Sterling corporate bond market makers (iii) Members of the SMF with DWF access |
| Function(s) | MP implementation |
Settlement systems and intra-day liquidity facilities
| Settlement system | RTGS, since 1996 |
|---|---|
| Intra-day liquidity facility | Intra-day collateralised loan |
| Charge | No charge |
| Foreign currency settlement system | No |
| CLS participation by banks | Yes |
| Other settlement system(s) | Yes 16 |
Collateral
| Standing facilities: List of eligible collateral | Gilts (including gilt strips) Sterling Treasury bills Bank of England securities HM Government non-sterling marketable debt Sterling, euro, US dollar and Canadian dollar denominated securities (including associated strips) issued by the governments and central banks of Canada, France, Germany, the Netherlands and the United States |
|---|---|
| Standing facilities: Discretion of central bank on collateral 17 | The Bank sets out public eligibility criteria, though has the discretion to change those criteria as required |
| Open market operations: List of eligible collateral | Collateral split according to liquidity characteristics Level A (eg highly liquid high-quality sovereign debt) eligible for intra-day liquidity, short-term OMOs, Indexed Long-Term Repo (ILTR), Discount Window Facility (DWF), Contingent Term Repo Facility (CTRF), Funding for Lending Scheme (FLS) and Term Funding Scheme (TFS/TFSME): 1. Gilts (including gilt strips) 2. Sterling Treasury bills 3. Bank of England securities 4. HM Government non-sterling marketable debt 5. Sterling, euro, US dollar and Canadian dollar denominated securities (including associated strips) issued by the governments and central banks of Canada, France, Germany, the Netherlands and the United States Level B (eg liquid high quality sovereign, supranational, mortgage and corporate bonds) eligible for ILTR, DWF, CTRF, FLS and TFS/TFSME. Level C (eg less liquid securitisations, own-name securities and portfolios of loans) eligible for DWF, and from 2014, ILTR as well as CTRF, FLS and TFS/TFSME. |
| Open market operations: Discretion of central bank on collateral 18 | The Bank sets out public eligibility criteria, though has the discretion to change those criteria as required. The Bank does not normally accept equities as collateral under the SMF but has put in place (as of August 2018) the technical measures to allow it to do so at its discretion, should the need arise. |
Dissemination of operational information: liquidity forecast
| Forecast published? | No |
|---|---|
| Channel(s) | |
| Timing | |
| Remarks |
Dissemination of operational information: open market operations
| Volume and price published? | Yes |
|---|---|
| Channel(s) | Wire services, BoE website |
| Timing | Between 5 minutes and 10 minutes after the close of the auction depending on the complexity of the operation |
Dissemination of operational information: standing facilities
| Lending facility usage: Channel(s) | Wire services, BoE website |
|---|---|
| Lending facility usage: Timing | Average use over the maintenance period is published on the third Wednesday after the relevant maintenance period |
| Deposit facility usage: Channel(s) | Wire services, BoE website |
| Deposit facility usage: Timing | Average use over the maintenance period is published on the third Wednesday after the relevant maintenance period |
Other information dissemination
| Type | (i) The Sterling Overnight Index Average (SONIA), a widely used interest rate benchmark and the reference rate for sterling Overnight Indexed Swaps (OIS). The BoE became its administrator in April 2016 taking on the end to end process in April 2018. (ii) Aggregate total stock of APF corporate bonds purchased (iii) The Bank’s holdings of APF corporate bonds by sector (iv) When active - Results of gilt APF auctions, including offers received and accepted, weighted average price, highest accepted price and lowest accepted price for each stock offered (v) Aggregate total stock of APF gilts purchased to date (vi) The total amount of TFSME lending outstanding (vii) The amount of TFSME lending outstanding, broken down by counterparty |
|---|---|
| Channel(s) | (i) Bloomberg, Reuters, BoE website (ii) BoE website, Reuters, Bloomberg (iii) BoE website, Reuters, Bloomberg (iv) BoE website (v) BoE website, Reuters, Bloomberg (vi) BoE website, Reuters, Bloomberg (vii) BoE website |
| Timing | (i) 9am daily (BoE website by 10am daily) (ii) Weekly – every Thursday at 3.00pm (iii) Monthly – first Thursday of the month at 3.00pm (iv) Post-operation (v) Weekly – every Thursday at 3.00pm (vi) Weekly – every Thursday at 3.00pm (vii) Quarterly – with a 5 week lag |
1 Describe as well the legal status of the mandate and involvement of government
2 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).
3 For instance, economic and inflation forecasts related to policy decision.
4 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.
5 From Bank of England weekly report - as at 14 September
6 Reserves as a percentage of 2021 GDP.
7 With the exception of CCP participants.
8 No carry-over, but reserves are remunerated if on average over a maintenance period they are within a range around the reserves target.
9 Likely that current reserves levels are a surplus over banks’ unconstrained reserve demand – but reserves averaging currently suspended.
10 TFSME can be repaid early as and when participants wish to.
11 The term ‘broker-dealers’ refers to PRA-designated investment firms, see www.bankofengland.co.uk/pra/pages/authorisations/designatedfirmslist.aspx.
12 The term ‘broker-dealers’ refers to PRA-designated investment firms, see www.bankofengland.co.uk/pra/pages/authorisations/designatedfirmslist.aspx.
13 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).
14 The term ‘broker-dealers’ refers to PRA-designated investment firms, see www.bankofengland.co.uk/pra/pages/authorisations/designatedfirmslist.aspx.
15 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.
16 Retail clearings not relevant to the money market or monetary policy implementation – those for standing orders etc, for cheques and giro credits, for credit and debit cards, and for automated teller machines. Also payment systems embedded within CREST, the UK securities settlement system – used for market repos and Bank of England repos of securities held in CREST.
17 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
18 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.