The Bank's operations in the sterling money markets serve both of the Bank's Core Purposes. The operations are designed to:
Implement the Monetary Policy Committee's decisions in order to meet the inflation target. The Bank usually does this by paying interest at Bank Rate on the reserves balances held by commercial banks and building societies. Since March 2009, when the Monetary Policy Committee initiated 'Quantitative Easing', it has also involved undertaking a targeted amount of asset purchases, which are financed by the creation of central bank reserves.
Reduce the cost of disruption to the liquidity and payment services supplied by banks to the UK economy. The Bank does this by balancing the provision of liquidity insurance against the costs of creating incentives for commercial banks and building societies to take greater risks, and subject to the need to avoid taking risks onto its own balance sheet.
The Bank is able to undertake these tasks because it is the sole supplier of 'central bank money' in the United Kingdom. Central bank money takes two forms - the banknotes used in everyday transactions and balances ('reserves') that are held by commercial banks and building societies at the Bank. Central bank money is at the heart of the monetary policy transmission mechanism and of the payment and liquidity services provided by the banking system.
The permanent framework governing the Bank's operations in the sterling money markets is known as the 'Sterling Monetary Framework' and is set out in the Bank's 'Red Book'.
Over the course of the financial crisis the Bank introduced new facilities - some of which are temporary - to achieve its objectives. Some of these operations, including Quantitative Easing, have been undertaken by the Bank's Asset Purchase Facility, which, because of the risks posed to the Bank's balance sheet, is indemnified by HM Treasury.