Liquidity is how quickly assets (such as cash or cash equivalents) can be bought or sold.
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 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.
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.
The MPC make decisions about how we try to reach the inflation target set by HM Treasury.
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
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 usually 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.
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.
Collateral is an asset that a borrower offers a lender to secure a loan. If a borrower fails to repay a loan, the lender can keep or sell the collateral.
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.
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