United Kingdom

United Kingdom[£]

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 government's current economic policy objective is for 'strong, sustainable and balanced growth.'

Within the Bank of England, the Monetary Policy Committee (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). As of end August 2019, asset purchases of UK government bonds totalled GBP 435 bn.

In August 2016 - the most recent point at which the MPC changed its policy decision on the size of asset purchases - a GBP 10 bn 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.

The MPC also introduced a Term Funding Scheme (TFS) in August 2016. The TFS was designed to address a risk that cuts in Bank Rate to a level approaching the zero lower bound might have less impact than cuts made when rates were higher, if lenders chose not to pass on the rate cut to households and businesses in order to protect their margins. It was calibrated such that any reduction in Bank Rate had a broadly neutral impact on margins in aggregate. The TFS provided four-year funding for banks and building societies at interest rates close to Bank Rate against a wide range of collateral. Borrowing allowances were calculated based on a proportion of firms' stocks of eligible lending, as well as increases in firm's net lending over an 18 month reference period. The scheme closed to new lending in February 2018, as envisaged when it was introduced, having made GBP 127 billion of loans.

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. Looking to the future, the balance sheet is likely to reduce in size again over time. The MPC will decide when to scale back asset purchases and consideration of this and other related issues is routinely published in MPC minutes.2 In 2018 the Bank began a process of engagement with the market to understand the implications of changes in its balance sheet moving forward.3

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 typically monthly (but 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.

In July 2012, the Bank and HM Treasury launched a Funding for Lending Scheme (FLS) in response to an increase in bank funding costs and interest rates during the crisis in the euro area. The FLS was designed to incentivise banks and building societies to boost their real economy lending by providing them with four-year funding at below market rates, with both the price and quantity of funding provided linked to their performance in lending to the UK real economy. The FLS was a joint scheme between the MPC and Financial Policy Committee.

1

More details can be found here.

2

See, for example, the Minutes of the June 2018 MPC meeting.

3

See here for the 2018 Discussion Paper. See here for a 2019 speech on how the Bank's Balance Sheet will be used for future monetary policy implementation.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Monetary Policy Committee
Major mandates Maintain price stability within the United Kingdom and subject to that, to support the economic policy of Her 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; currently also includes target for Asset Purchases financed by the creation of central bank reserves.

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 the June 2018 MPC minutes, the Bank announced that it was minded to use a variant of the current floor system as and when the stock of purchased assets was reduced
maintenance period Six to eight weeks
Main operation In the current floor system there are no regular monetary policy related reserves supplying operations. The quantity of reserves is a result of those injected via asset purchases, the Term Funding Scheme, indexed long term repos, and other factors.
functions N/A
maturity (days) N/A
regular interval N/A
frequency N/A
Overall frequency N/A
Discretion left to operational desk N/A
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 inflation report 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 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 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 487 bn
Actual reserve as % of GDP 23.0%

Main features of reserve requirements

Averaging N
Carry-over N
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
Most volatile factor(s) Note issue
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
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
Function(s) Limits interest rate volatility; provides liquidity insurance against frictional payment shocks

Open market operations: repo or reverse repo

Name/Type (i) RP – tenders
(ii) Indexed Long-Term Repos
(iii) Contingent Term Repo Facility
(iv) Fine-tuning RP or RRP
Maturity (i) 1W (suspended from Aug 09)
(ii) 6 month
(iii) Any term, as determined by BoE
(iv) O/N or longer (suspended from Aug 09)
Frequency (i) Weekly
(ii) Monthly
(iii) As needed
(iv) Once a month at end of maintenance period and/or ad hoc
Pricing method (i) & (iv) Previously variable rate auctions (but currently suspended)
(ii) & (iii) Uniform price auctions
Access limited by/to (i) & (iv) Banks and active intermediaries (but currently suspended)
(ii) & (iii) Banks, building societies and broker-dealers
Function(s) (i) Reserves management
(ii) Liquidity insurance
(iii) Liquidity insurance
(iv) 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 (i) OT purchases of UK government bonds (QE)
(ii) OT purchases of sterling corporate bonds (CBPS)
(iii) DL Term Funding Scheme (closed for new lending in Feb 2018)
Form
Frequency (i) and (ii) As needed when mandated by Monetary Policy Committee
(iii) Ongoing during 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
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

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 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):
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.
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.
Open market operations: Discretion of central bank on collateral 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) 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 that week and to date
(vi) The total amount of TFS lending outstanding
(vii) The amount of TFS 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 Friday at 10.00am
(vi) Weekly – every Friday at 10.00am
(vii) Quarterly – with a 5 week lag