As main banker to the Government and ultimate banker to the banking system, the Bank of England is necessarily involved in day-to-day operations in the sterling money market. During the past eighteen months there have been a number of changes to the Bank's operating techniques: the Bank has ceased to announce a minimum lending rate, and its dealing arrangements now permit market forces to influence the structure of short-term interest rates to a greater extent than before. Nevertheless, the authorities continue to hold firm views on the appropriate level of very short-term rates, and seek to keep these within an undisclosed band. The Bank now publishes each day its estimate of the cash position of the money market, and details of its own operations.
After sketching the historical background to these changes, this article describes how the present arrangements evolved, and provides a detailed account of the Bank's daily procedures for deciding what action to take in the money market and for executing it. Finally, these money market arrangements are placed in the context of overall monetary policy.
The role of the Bank of England in the money market