Explanatory Notes - Bank of England Sterling Monetary Framework
OVERVIEW
AVAILABILITY
SOURCES
DEFINITIONS
FURTHER INFORMATION
OVERVIEW
The Bank of England’s framework for its operations in the sterling money markets is designed to implement the interest rate decisions of the Monetary Policy Committee (MPC) while meeting the liquidity needs, and so contributing to the stability of, the banking system as a whole. The MPC meets each month to decide the level of the Bank Rate, which is paid on banks’ reserves balances at the Bank if they are within the specified range of the target they have set. Monetary policy is therefore implemented in maintenance periods running from the day of one MPC decision to the eve of the next. The Bank supplies the reserves that banks in aggregate need to be within their target ranges on average over the maintenance period. The Bank Rate, paid on reserves balances is passed throughout the financial system, influencing interest rates for the whole economy.
Data are available monthly from May 2006 and daily from June 2006. The data are available not seasonally adjusted. Publication of data will usually occur on the Monday following an MPC decision in Tables D2.1.1, D2.2.1 and D2.2.2 in Monetary and Financial Statistics or subject to the published schedule of releases.
SOURCES
The data were compiled by the Bank of England.
DEFINITIONS
The Bank pays the Bank Rate on reserve balances which banks and building societies may hold, voluntarily, with the Bank. Reserve account holders set in advance a target for their reserves for each maintenance period. The Bank remunerates these balances at the Bank Rate so long as they are, on average over the maintenance period, within a given percentage range of the target set. A reserve account holder whose average balance falls outside its target range pays a penalty. In that case the Bank remunerates the actual average reserve balance at the Bank Rate, but charges a penalty equal to the official rate multiplied by the excess or shortfall.
Average reserve balances, the reserves target and target range for total reserve holders are shown on the top right hand side of Table D2.1.1 and as time series in Table D2.2.1.
The Bank also makes available to reserve-holders and other CRD-paying banks and building societies two Operational Standing Facilities. These may be used to borrow overnight from the Bank or to make overnight deposits with the Bank. The interest rate in the lending facility is 25 basis points (¼ of a percentage point) above the Bank Rate; the interest rate in the deposit facility is 25 basis points below the Bank Rate.
These interest rates, and those charged or paid in short-term Open Market Operations, are set out in the top left hand corner of Table D.2.1.1 and as time series in Table D.2.2.1.
The Bank manages its balance sheet with the aim of ensuring that reserve holders in aggregate are able to hold reserves within their target ranges and therefore at the Bank Rate. It does this by lending money to the market in its Open Market Operations. These take several forms. Each week the Bank undertakes a one-week operation, either lending money, by way of repo, or borrowing by selling bills. On the last day of the maintenance period it also undertakes a “fine tune repo” which supplies money to the market overnight or drains money from the market overnight. This is designed to ensure that aggregate reserves provided over the maintenance period as a whole are as close as possible to target. Fine tune operations may also be conducted earlier in the maintenance period. Weekly and fine tune operations are undertaken at the Bank Rate as they mature before the next MPC meeting. The Bank also provides money to the market in longer-term repos with maturities of about 3, 6, 9 and 12 months. Because these operations mature at dates for which the Bank Rate is not yet known, they are undertaken at rates bid by counterparties in a competitive tender. In some circumstances, the Bank may set a minimum bid rate. In addition, the Bank uses Open Market Operations to purchase gilt-edged securities (gilts).
The middle panel of Table D2.1.1 shows new and maturing open market operations . The difference between the new and maturing operations is the amount supplied to or drained from the money market.
The second panel in Table D2.1.1 gives more details of the longer-term repos and gilt purchases in a maintenance period.
Table D2.2.1 shows, for successive maintenance periods, the average amounts outstanding on the Bank’s balance sheet in repos, in Bank Bills, in gilts, in the Operational Standing Facilities (these replace Standing Facilities on 20 October 2008) and in reserves accounts.
In its monetary policy operations the Bank of England lends to its counterparties only against security (by way of repo). When draining reserves in fine tuning repo operations the Bank provides security to its counterparties. Table D2.2.1 shows the cash leg of these transactions – their impact on reserves. Table D2.2.2 shows the security taken or provided in Open Market Operations.
In transactions adding reserves which take the form of reverse repos the Bank buys securities from its counterparties and undertakes to sell them equivalent securities when the transactions mature. In those fine-tuning operations to drain reserves which take the form of repos the Bank sells securities to its counterparties with an undertaking to buy back equivalent securities. In Table D2.2.2 securities due to be delivered when reverse repos and repos mature are referred to as “collateral”.
Table D2.2.2 shows for each maintenance period the daily average net value of the collateral used in these operations. In fine-tuning repo draining operations, the Bank provides collateral in the form of gilts or UK Treasury bills. In Table D2.2.2 such collateral is netted off the gilts and UK Treasury bills delivered by counterparties to the Bank.
To help protect itself against loss the Bank requires counterparties to provide collateral with a greater market value than the finance provided. Similarly when draining reserves the Bank provides collateral with a smaller market value than the cash it drains. The amounts of collateral shown in Table D2.2.2 are thus greater than the amounts of finance provided, shown in Table D2.2.1.
In Table D2.2.2 overall net collateral is analysed in two ways – by the transactions which gave rise to the collateral (on the left hand side of the table) and by the form the collateral takes (on the right hand side). Movements in the market price of collateral while repos are outstanding can cause contraction or expansion in the margin between the value of the collateral and the value of the repo lending itself (including accrued interest). When such changes pass certain trigger points the Bank can call for additional collateral from its counterparties (if the value of existing collateral has fallen) or counterparties can call for collateral from the Bank (if the value of existing collateral has risen). Such calls are reflected in the column headed “Margin calls” in Table D2.2.2 – positively in the case of margin calls made by the Bank and negatively for calls made by counterparties. Margin calls are based on the aggregate values of finance and collateral provided in all money market repos with a particular counterparty. They cannot therefore be ascribed to particular repo transactions or types of transaction.
Counterparties may substitute one form of collateral for another during the life of a reverse repo. Such substitutions can affect the values recorded in Table D2.2.2.
More details of the collateral eligible for use in these operations are given at www.bankofengland.co.uk/markets/money/eligiblesecurities.htm.
