The Monetary Policy Committee (MPC) of the Bank of England decided at its meeting ending on 3 August to raise the limit on purchases that may be undertaken by the asset purchase facility (APF). This will encompass further purchases of gilts, along with a new scheme to purchase private sector assets and a new funding scheme that will lend central bank reserves to banks and building societies for an extended period at a rate close to bank rate (the term funding scheme).
As set out in the MPC’s remit, active monetary policy has a critical role to play in supporting the economy. It is the MPC’s view that in the absence of monetary policy stimulus there would be undesirable volatility in output and employment, and it would be less likely to achieve a sustainable return of inflation to the target in the medium term.
The MPC has judged that it would be appropriate to impart further stimulus through additional asset purchases. The MPC expects that purchases of corporate bonds will improve the availability of credit to UK companies and that further purchases of gilts will reduce borrowing costs, raise asset prices, affect expectations and confidence, and thereby support demand in the economy. The term funding scheme should ensure that the very low level of bank rate is passed through to lending rates to households and businesses.
In line with the requirements in the MPC remit, the amendments to the APF that could affect the allocation of credit and pose risks to the Exchequer have been discussed with Treasury officials. The risk control framework previously agreed with the Treasury will remain in place, updated to reflect the changes to the APF.
Oversight arrangements for the expanded APF will be strengthened. These will include enhanced information sharing between the Bank and Treasury to monitor the operation and performance of the facility, and regular risk oversight meetings of Treasury and Bank senior officials. There will also be an opportunity for the Treasury to provide views to the MPC on the design of the schemes within the APF, as they affect the Government’s broader economic objectives and may pose risks to the Exchequer.
I have therefore authorised an increase of £70 billion in the amount of assets that the APF is able to purchase financed through the issuance of central bank reserves, of which £10 billion can be eligible private sector assets, bringing the total amount for purchases to £445 billion. I have also authorised an extension of the definition of assets eligible to be held in the APF to include secured lending of central bank reserves. The MPC expects that the value of this lending would increase in line with the amount outstanding in the TFS, which will in turn be determined by usage of the scheme, and could reach around £100 billion. I have therefore authorised an increase in the total size of the APF of £170 billion. This will bring the maximum total size of the APF to £545 billion.
The Government will continue to indemnify the Bank and the APF from any losses arising out of, or in connection with, the facility. If the liability is called, provision for any payment will be sought through the normal supply procedure.
On 4 August I wrote to the Chairs of Public Accounts Committee and Treasury Select Committee and invited them to raise any objections to my decision. A full departmental minute has been laid providing more detail on this contingent liability.