In June 2018, the Monetary Policy Committee (MPC) updated its guidance on asset purchases. It noted that it ‘intended not to reduce the stock of purchased assets until Bank Rate reached around 1.5%, compared to previous guidance of around 2%.’ The MPC Minutes also confirmed that, as and when the stock of assets purchased via the Asset Purchase Facility (APF) is reduced, the Bank of England (the Bank) ‘was minded to continue to use a variant of the current floor system to control short-term interest rates. This would mean that the Bank would meet banks’ demand for central bank reserves in full at Bank Rate.’
A consequence of this approach is that the size of the Bank’s balance sheet in the future would depend in large part on the demand for reserves. However, following many years of change in the structure, regulation and behaviour of banks, the private sector’s future demand for reserves is uncertain, both in the United Kingdom and globally.
This paper starts a discussion on the future size of the Bank’s balance sheet and the factors that are likely to determine it. The Bank expects to learn more about the demand for reserves over time and plans to update on the findings from this initial stage of work in publications and speeches. The questions on which the Bank will base its discussions are set out in this paper.
Discussion paper on the Bank of England’s future balance sheet and framework for controlling interest rates