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Sterling Monetary Framework

The Bank's framework for its operations in the sterling money markets is designed to implement the Monetary Policy Committee's (MPC) monetary policy decisions while meeting the liquidity needs, and so contributing to the stability of, the banking system as a whole.

The Bank is the sole issuer of sterling central bank money, the final, risk-free settlement asset in the UK. This enables the Bank to implement monetary policy and makes the framework for the Bank's monetary operations central to liquidity management in the banking system as a whole and for individual banks and building societies.

Normally the MPC sets policy via interest rates, i.e. the price of money. As Bank Rate has been reduced close to zero, the MPC have been setting policy by influencing the supply of money - 'Quantitative Easing'.

The Bank's sterling market operations have two objectives, stemming from its monetary policy and financial stability responsibilities as the UK's central bank:

Normally, to implement monetary policy by maintaining overnight market interest rates in line with Bank Rate, so that there is a flat risk-free money market yield curve to the next MPC decision date, and there is very little day-to-day or intra-day volatility in market interest rates at maturities out to that horizon.
to reduce the cost of disruption to the liquidity and payment services supplied by commercial banks. The Bank does this by balancing the provision of liquidity insurance against the costs of creating incentives for banks to take greater risks, and subject to the need to avoid taking risk onto its balance sheet.

The framework for the Bank's operations in the sterling money markets is set out in the Bank's 'Red Book':

The Framework for the Bank of England's Operations in the Sterling Money Markets (the 'Red Book') (306k)
January 2008 electronic update of the 'Red Book'

When Bank Rate was reduced close to zero in March 2009, the MPC's instrument of monetary policy shifted towards the quantity of money provided rather than its price. This resulted in a number of changes to the SMF detailed in the document below.

Consolidated Market Notice: Sterling Monetary Framework and Asset Purchases
20 August 2009 (38k)

In autumn 2008, the Bank undertook a consultation on potential developments to this framework:

The Development of the Bank of England's Market Operations (2Mb)
October 2008

The Bank has now incorporated Indexed Long-Term Repos against a broader range of collateral, as a permanent part of the SMF.

The Bank intends to extend the range of collateral eligible in the Discount Window Facility to include portfolios of loans to individuals and non-banking companies. It is expected that this extension will take place during 2011.