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 has four specific objectives:
- Objective 1: Overnight market interest rates to be in line with the Bank's official rate, so that there is a flat money market yield curve, consistent with the official policy rate, out to the next MPC decision date, with very limited day-to-day or intra-day volatility in market interest rates at maturities out to that horizon.
- Objective 2: An efficient, safe and flexible framework for banking system liquidity management - both in competitive money markets and, where appropriate, using central bank money - in routine and stressed, or otherwise extraordinary, conditions.
- Objective 3: A simple, straightforward and transparent operational framework.
- Objective 4: Competitive and fair sterling money markets.
The framework has three main elements:
- Reserve-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 the Bank's official rate.
- Standing facilities. Standing deposit and (collateralised) lending facilities are available to eligible UK banks and building societies. They may be used on demand. In normal circumstances, they carry a penalty, relative to the Bank's official rate, of +/- 25 basis points on the final day of the monthly reserves maintenance period and of +/- 100 basis points on all other days.
- 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 reserve targets. OMOs comprise short-term repos at the Bank's official rate, long-term repos at market rates determined in variable-rate tenders and outright purchases of high-quality bonds.
Key Resources
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The Framework for the Bank of England's
Operations in the Sterling Money Markets (the 'Red Book') |
