Bank of England Homepage
 
About the BankMonetary PolicyBanknotesMarketsFinancial StabilityPublicationsStatisticsEducation
Markets

Sterling Money Market Operations

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

The Bank of England is the sole issuer of sterling central bank money, the final, risk-free settlement asset in the United Kingdom. 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 by individual banks and building societies.

The Bank's market operations have two Objectives, stemming from its monetary policy and financial stability responsibilities as the United Kingdom's central bank. They are:

(i) 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 intraday volatility in market interest rates at maturities out to that horizon.

(ii) To reduce the cost of 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 has four main elements:

  • Reserves-averaging scheme. Eligible UK banks and building societies undertake to hold target balances (reserves) at the Bank on average over maintenance periods running from one MPC decision date until the next. If an average balance is within a range around the target, the balance is remunerated at Bank Rate.
  • Operational Standing Facilities. Operational standing deposit and (collateralised) lending facilities are available to eligible UK banks and building societies. They may be used on demand. In normal circumstances, the lending / deposit rates are 25bp higher than Bank Rate and 25bp below Bank Rate respectively.
  • A Discount Window Facility. This is a facility to provide liquidity insurance to the banking system. Eligible banks and building societies may borrow gilts, for up to 30 days, against a wide range of collateral in return for a fee, which will vary with the collateral used and the total size of borrowings.
  • OMOs. Open market operations (OMOs) are used to provide to the banking system the amount of central bank money needed to enable reserve-scheme members, in aggregate, to achieve their reserves targets. OMOs comprise short-term repos at Bank Rate, long-term repos at market rates determined in variable-rate tenders and outright purchases of high-quality bonds.

Key Resources

pdf icon

The Development of the Bank of England's Market Operations
A consultative paper by the Bank of England
October 2008
Download PDF (2mb)

   

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

This routine electronic update of the 'Red Book' reflects the introduction of the Bank's electronic system for open market operations (OMOs), Btender, and the scheduled start of gilt-purchases OMOs by the Bank, as previewed in the February 2007 electronic update. It also clarifies the technical details of the approach that the Bank would expect to take to certain parts of the regime in the event of very low levels of Bank Rate.
Download PDF (306k)

Back to the top

Related Links
Freedom of Information
Sitemap Privacy Policy Disclaimer