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Home > Statistics > Explanatory Notes - Bank of England Sterling Money Market Operations (since May 2006)
 

Explanatory Notes - Bank of England Sterling Money Market Operations (since May 2006)

Overview

The Bank of England’s Sterling Monetary Framework (SMF) is designed to implement the decisions of the Monetary Policy Committee (MPC) and to reduce the cost of disruption to the critical financial services, including liquidity and payment services, supplied by SMF participants to the UK economy. The MPC meets eight times a year to decide the level of the Bank Rate, which is paid on reserves balances held at the Bank.  Monetary policy is therefore normally implemented in maintenance periods running from the day of one MPC decision to the eve of the next. The Bank Rate, paid on reserves balances, influences the whole term structure of sterling interest rates.

The Government announced on 19 January 2009 that it was authorising the Bank to purchase a range of high quality private sector assets as part of a package of measures to increase the availability of corporate credit. The following sterling assets were initially eligible for purchase: commercial paper, corporate bonds, paper issued under the Credit Guarantee Scheme (CGS), syndicated loans and asset-backed securities created in viable securitisation structures. All purchases were made by a subsidiary of the Bank, the Bank of England Asset Purchase Facility Limited (BEAPFF).

Following a further exchange of letters between the Bank of England and HM Treasury published on 5 March 2009, the Bank was authorised to purchase private sector assets financed by central bank reserves; and to purchase gilts in the secondary market financed by central bank reserves, as part of the implementation of monetary policy.
On the 6th August 2009, the Bank announced it was to participate in a gilt lending programme with the DMO. The objective was to avoid exacerbating shortages in the gilt repo markets of specific stocks due to the Bank withdrawing gilts from the market in purchases for the BEAPFF.
 
On 4 August 2016 the MPC voted to increase the stock of purchases of UK government bonds by the APF to £435bn. At the same time, the previous private sector asset purchase schemes were closed, and a new Corporate Bond Purchase Scheme was announced, with the Bank looking to purchase a portfolio of up to £10bn of sterling bonds representative of issuance by firms making a material contribution to the UK economy, in order to impart broad economic stimulus.  The MPC also announced the Term Funding Scheme, designed to reinforce the transmission of Bank Rate cuts to those interest rates actually faced by households and businesses by providing term funding to banks at rates close to Bank Rate. Drawings in the Term Funding Scheme are also financed by central bank reserves.

 

Availability

Data in Tables D2.1.1 and D2.2.1 are available monthly from June 2006. Daily data in Table D2.2.3 are available from May 2006. Data in table D2.3.1 are available weekly as at close of business on a Thursday from February 2009 to 16 September 2016, and as at close of business on a Wednesday from 22 September 2016. (This change has been made following the introduction of the Term Funding Scheme, to align with the publication of the Bank’s Weekly Report.) Data in table D2.3.4 are available from September 2016. Publication of data will usually occur on the Monday following an MPC decision on the Interactive Database, and on the 21st working day of each calendar month in Bankstats (Monetary and Financial Statistics). Tables D2.3.1 and D2.3.4 are updated weekly. Data in Table D2.2.4 are published quarterly. The data available are not seasonally adjusted.

Sources

The data were compiled by the Bank of England.

 

Definitions

The Bank pays the Bank Rate on reserves balances which SMF participants may hold, voluntarily, with the Bank. Under the reserves averaging regime, which was suspended in 2009, reserves account holders would set in advance a target for their average daily reserves balance for each maintenance period. The Bank would remunerate these balances at the Bank Rate so long as they were, on average over the maintenance period, within a given percentage range of the target set.

Average reserves balances, the reserves target and target range for total reserves holders are shown as a time series in Table D2.1.1 and Table D2.2.1.

Reserves account holders also have access to two Operational Standing Facilities (OSFs). 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 a fixed spread above Bank Rate; the interest rate in the deposit facility is set at 0 bps while Bank Rate is 0.25% or below.

These interest rates are set out as time series in Table D.2.1.1 and usage of the OSFs is in Table D.2.2.1.

Under a reserves averaging regime, the Bank manages its balance sheet with the aim of ensuring that reserves holders in aggregate are able to hold reserves within their target ranges and therefore at Bank Rate. It does this by adjusting the supply of reserves to the market in its Open Market Operations (OMOs). These take several forms. The Bank may undertake a one-week operation, either supplying reserves, by way of reverse repo, or “draining” them by selling Bank of England sterling bills. On the last day of the maintenance period it may undertake a “fine tune” which supplies money to the market overnight or drains money from the market overnight. 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 reserves to the market in longer-term repos, typically with maturities of 6 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, and are indexed to Bank Rate. In some circumstances, the Bank may set a minimum bid rate. In addition, the Bank may use Open Market Operations to purchase gilt-edged securities (gilts).

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 replaced 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. 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 D2.2.3 gives details of the Open Market Operations in a maintenance period.  The difference between the new and maturing operations is the amount supplied to or drained from the money market.
SMF participants are eligible to apply to use the Bank’s Discount Window Facility (DWF). The purpose of the DWF is to provide liquidity insurance to the financial system. The DWF is not intended for firms facing fundamental problems of solvency or viability. Eligible banks, building societies, broker-dealers and CCPs may borrow gilts (or cash) against a wide range of collateral in return for a fee, which will vary with the collateral used and the total size of borrowings. Tables D2.2.4 shows the average aggregate daily value of gilts (or cash) lent (published five quarters in arrears).
The value of purchases in Table D2.3.1 in each APF facility each week is the amount paid by the Bank of England Asset Purchase Facility Fund (BEAPFF) to sellers. The value of drawings in Table D2.3.4 each week is the amount lent by BEAPFF to participants in the Term Funding Scheme.

 

Key Resources

 

 ‘The implications of money market reform for data published in Monetary and Financial Statistics’ (2006) Bankstats (Monetary and Financial Statistics), June

 
 
More details of the collateral eligible for use in OMOs, the OSF lending facility, the DWF and Term Funding Scheme are given on the Markets eligibility page.
 
 
 
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