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Report on the Bank’s official market operations 2019-21

Bank of England 2021.10.06
he Bank regularly reviews its published framework for market operations conducted in support of monetary and financial stability. This includes operations conducted to implement the Monetary Policy Committee’s (MPC’s) policy decisions by transmitting Bank Rate and purchasing assets; and those that exist to safeguard financial stability by offering various forms of liquidity to the financial system. A list of the operations that are considered by this review can be found in the Bank’s Market Operations Guide. In the main, the Bank’s market operations are undertaken in sterling, but facilities also exist in a range of foreign currencies. Operations are also conducted both across the Bank’s own balance sheet and via subsidiaries. In 2018, the Bank adopted a new model for this review, in response to recommendations from the Bank’s Independent Evaluation Office (IEO) in their evaluation of the Bank’s provision of liquidity insurance. The Bank now aims to publish a short, factual report each year, covering key developments in facilities and their usage. In addition, every three years the Bank aims to also publish a more in-depth evaluation of its market operations, allowing for a stocktake of policy developments over a broader time period. This is the first such three-yearly report, and serves also to replace the review that was scheduled to be published in 2020 but that was deferred due to the Covid-19 (Covid) crisis. Except where otherwise stated, it therefore provides a factual update on the Bank’s official market operations over 1 March 2019 to 28 February 2021 (the end of the Bank’s financial year). However, it also details some of the important policy developments and debates over the past three years, and in particular reflects on the Bank’s response to Covid. The economic shock caused by Covid was by far the biggest test of central bank liquidity toolkits since the global financial crisis (GFC) of 2008?09. In common with central banks globally, the Bank deployed its market operations at unprecedented scale and pace over the review period. The size of the Bank’s balance sheet has grown significantly over that time, particularly after March 2020. Most of this activity also took place in unique operational circumstances, with staff and systems operating almost wholly remotely from the Bank’s head office. Throughout this period, the Bank has taken stock of its actions, identifying where the framework has worked well, and where future reflection might be needed. Overall, the Bank’s response is judged to have been effective in channelling liquidity to the banking system and in calming significant market dysfunction. Existing and new tools allowed the Bank to act at scale, working quickly and effectively, and in close co-ordination with other central banks. Weekly Indexed Long-Term Repo (ILTR) operations were heavily used by participants as the crisis unfolded. To buttress that flow of liquidity the Contingent Term Repo Facility (CTRF) was activated in March 2020. Operations backed by the standing dollar swap lines were offered at longer maturity, higher frequency and tighter pricing, supporting financial stability and offsetting the rapid deterioration in dollar funding conditions. In addition, the Liquidity Facility in Euros (LiFE) continued to offer to lend euros on a weekly basis. In response to MPC policy decisions asset purchase operations were dramatically scaled up, with the Bank’s holdings of gilts increasing by 91% since the beginning of March 2020 and holdings of corporate bonds doubling. Asset purchases were especially effective in calming core markets, in part due to the unprecedented pace at which the Bank operated. Despite this success, the Bank acknowledges the important ongoing debates around its use of asset purchase operations. This was discussed in an IEO review published in January 2021. The IEO review suggested that the Bank should ensure that the governance and implementation of quantitative easing (QE) remain fit for the future, and that the Bank should work to develop both its own and the general public’s understanding of QE as a tool. The Bank welcomed the IEO review and published its response alongside it, committing to implementing the IEO’s suggestions in full. Subsequently, in July 2021, the House of Lords Economic Affairs Committee (EAC) published an inquiryOpens in a new window into the Bank’s use of quantitative easing. The Bank contributed to that inquiry with written evidenceOpens in a new window and Governors’ testimony. The Bank’s responseOpens in a new window was published in September 2021. In addition, the MPC has set out a framework in August 2021 for guiding the tightening of monetary policy through a combination of higher Bank Rate and balance sheet unwind, as and when it judges it appropriate to do so. That framework has two important operational implications. First, the Bank’s balance sheet is likely to remain materially larger than it was before the GFC, reflecting a substantial increase in the demand for reserves. Work to determine the potential size of this ‘steady-state’ balance sheet, and ensure monetary policy can continue to be implemented effectively as this level is approached, will be an important priority as QE exit proceeds. Second, to the extent that central banks may be required to operate closer to the ‘effective lower bound’ (ELB) for interest rates than they have been in the past, the Bank will need to be ready to deploy a range of potential monetary policy tools, including Bank Rate and asset purchases, as judged appropriate by the MPC. As part of that preparation, the Bank has recently confirmed that internal technical preparations are in place to implement a negative Bank Rate, with or without tiered reserves account remuneration, if warranted. Alongside existing tools, the Bank also created new facilities to combat the economic effects of Covid. One example is the Covid Corporate Financing Facility (CCFF), which was launched in March 2020 and aimed to alleviate pressures on non-financial large companies’ cash flows created by the economic disruption caused by the pandemic. Over its active lifetime, this facility lent over ?37 billion to 107 different companies, which together employed almost 2.5 million people in the UK. A new Term Funding Scheme with additional incentives for small and medium-sized enterprises (TFSME) was also announced in March 2020. To date, it has provided ?91 billion in loans to banks in order to support the pass through of the decrease in Bank Rate, and incentivise banks to provide credit to households and businesses, particularly small and medium-sized enterprises. At the same time, there is recognition that the ‘dash for cash’ caused by the Covid crisis exposed a number of underlying vulnerabilities in the global financial system, particularly relating to the role of non-bank financial intermediaries (NBFIs). While pandemics of the scale seen in the past 18 months are not expected to recur regularly, there is a recognition across jurisdictions that the growing role of NBFIs requires reform both to the relevant regulatory frameworks, and to public sector backstops. The Bank is playing a leading role on both priorities.footnote[4] While there may be a need for new and targeted central bank tools to tackle core market dysfunction in response to how markets are changing, central bank interventions cannot be a substitute for reforms that mitigate the vulnerabilities in financial markets giving rise to liquidity stresses in the first place. Finally, growing recognition of the scale of the challenge posed by climate change led to a change in the remit of the MPC in 2021. In response, the Bank issued a Consultation Paper in May 2021 on ‘Options for greening the Bank of England’s Corporate Bond Purchase Scheme’, and aims to implement a set of changes in 2021 Q4.

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