Our role in the financial markets

Overview

Our mission is to maintain monetary and financial stability for the good of the people of the UK. To achieve our mission we take an active role in the financial markets to:     

• implement monetary policy  (to help maintain monetary stability);
• provide liquidity facilities to banks and financial firms (to help maintain financial stability); and
• operate a small number of other facilities (including to generate income to pay for the Bank of England’s activities)

The framework we use for our involvement in the sterling money markets is called the Sterling Monetary Framework (SMF). 

We implement monetary policy

As the UK’s central bank, we support our mission by implementing monetary policy to keep inflation low and stable. Our Monetary Policy Committee (MPC) decides what action we need to take to meet Government’s target of keeping inflation at 2%. We then implement the MPC’s monetary policy in two ways. 

First, we pay Bank Rate on the money that banks and other financial firms hold in accounts with us (known as reserves accounts). 

Second, we make asset purchases on behalf of the Asset Purchase Facility (also known as Quantitative Easing) to help boost spending and investment in the economy. This can mean:

• buying bonds issued by the UK government (known as gilt purchases)
• buying bonds issued by private companies (known as corporate bonds)

To keep the level of assets purchased in line with MPC decisions, we reinvest cash flows when assets we have bought mature. 

Between September 2016 and February 2018, we lent money to banks and building societies at rates close to Bank Rate, to encourage them to reflect cuts in Bank Rate to households and companies. This is called the Term Funding Scheme. We closed this scheme to new lending in February 2018, but we have some existing loans outstanding. 

We provide liquidity facilities to banks and financial firms

We stand ready to provide liquidity to banks or other financial firms that are members of our Sterling Monetary Framework, by offering to swap high-quality but less liquid collateral for liquid assets. And those firms can also deposit money with us.

Lending is routinely available in the form of our indexed long-term repo operation, which is run every month to help firms manage their predictable sterling liquidity requirements. We can change the frequency of our routine lending in response to a shock, or in anticipation of a future stress. 

If a firm has an unforeseen but short lived need for sterling liquidity they can borrow from us overnight using our Operational Standing Facility.

If they need a longer term loan they can use our Discount Window Facility. Or, in times of more widespread stress, we can launch our Contingent Term Repo Facility which gives us more flexibility on terms and pricing to respond to market conditions.

Beyond sterling, we routinely offer to lend US dollars to banks in the UK through a regular weekly dollar operation.

Previously, we lent Treasury Bills to banks and building societies to encourage them to lend more to their customers. This is our Funding for Lending Scheme. We closed this scheme to new lending in January 2018, but we have some existing loans outstanding.  

We operate a small number of other facilities

To generate income to pay for the work we do, we manage our own income portfolio. We invest in bonds in order to pay for the costs of our monetary policy and financial stability functions.    

In the future we are planning to implement a Shari'ah compliant deposit facility to enable Islamic banks to hold funds at the Bank of England via a non-interest based facility.