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'.

Policy setting via interest rates

Each reserves maintenance period runs between the monthly scheduled MPC meetings. Reserves scheme members undertake to maintain a level of reserves within a defined range around a target they choose, averaging across reserve balances at the end of each calendar day over the maintenance period as a whole.

Reserves are remunerated at Bank Rate although, interest penalties are applied if, at the end of the maintenance period, scheme members fail to achieve the reserves target by holding an average level of reserves higher or lower than the specified range. Settlement banks also pay a penalty if their reserves account is overdrawn at the end of any day.

Subject to meeting the monthly target balance and avoiding overnight overdrafts, reserves balances can be varied freely to meet day-to-day liquidity needs. For example, funds can be moved on and off reserves accounts up to the close of CHAPS in order to accommodate unexpected, end-of-day payment in/outflows. In this way, reserves balances can be used as a liquidity buffer. Within the Bank's ceilings on reserves targets, reserves banks can also change their reserves target from month to month in response to, for example, variations in the size or uncertainty of their payments flows.

The Bank uses open market operations (OMOs) to provide sufficient central bank money to the market to enable reserves scheme members in aggregate to meet their targets.

Policy since March 2009

As part of the Bank's approach to Quantitative Easing, the Bank currently remunerates all reserves balances held by reserves banks at Bank Rate. It has therefore suspended the usual system in which reserves banks choose reserves targets that they have to achieve on average over the maintenance period.

Initially, the Bank's operational approach was to ensure that the net supply of reserves was around the aggregate level of reserves targets initially set by reserves scheme participants for the maintenance period starting on 5 March, plus the amount of reserves injected via the purchase of assets acquired as authorised by the MPC. On 6 August 2009 the Bank amended its operational approach to the provision of reserves by ceasing to offer reserves in weekly short-term OMOs until further notice.

Market Notices

The main SMF Documentation sets out how the scheme works. These may be amended by the Bank from time to time by Market Notices.

• Consolidated Market Notice: Sterling Monetary Framework; Asset Purchases (15k)
  8 January 2010
• Consolidated Market Notice: Changes to the Eligibility Criteria for Access to Reserves Accounts and Other Sterling Monetary Framework Facilities (18k)
  13 November 2009

Click here to see all previous Market Notices, show

Information for participants

• Reserve Accounts in RTGS - Quick Reference Guide (38k)
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