The Bank of England Asset Purchase Facility (APF) was established as a subsidiary of the Bank of England on the 30th of January 2009 to fulfil the mandate of the Treasury Chancellor. The mandate was then expanded to allow the fund to be used as a monetary policy tool. In order for the transactions to be transparent to the general public, the bank decided to publish quarterly reports to show the composition of the balance sheet of the Bank of England. The bank’s executive directors of markets, monetary and statistical analysis were designated as directors of the facility. These directors make recommendations on the assets that the bank will buy, and the Governor of the bank makes the final decision on acquisitions.
The Fund’s initial objective was to improve liquidity and increase the flow of corporate credit by purchasing high-quality assets from the private sector, including commercial bonds and corporate bonds. These purchases would be financed by the issuance of treasury bills. The scope of the APF of the Bank of England was determined to be delimited by the monetary policy committee to meet the 2% target for inflation.
The first meeting took place in March 2009 and the committee decided to bid £75 billion on assets financed by the issuance of central bank reserves. In order to buy this amount of assets, the bank acquired mainly debt from the United Kingdom government and, to a lesser extent, private sector assets. The objective of this measure was to stimulate the supply of money and credit, to raise the growth rate of nominal spending to a consistent level in order to reach the goal of the inflation rate in the short term.
The same decision was made at the following May meeting. In the quarterly report of May 2009, it was mentioned that the acquisition of the Gilts began on March 11. The Gilts are bonds issued by the British government in pound sterling and are generally considered low-risk bonds. The British Gilts are equivalent to the U.S. Treasury securities. The Gilts can be of two types:
- Conventional issued in nominal terms
- Indexed to inflation
At the end of 2009 purchases by the committee increased considerably to reach amounts of £175 billion, but as at the start of this procurement program most of the assets acquired would be from government debt. These changes in the maximum purchase limits were modified at the request of the monetary policy committee. Since the end of 2009, the bank announced that it would act as a seller, as well as a buyer of corporate bonds in the secondary market.
During the 2010 meetings, the committee voted to keep the asset acquisition cap at £200 billion. In November 2010 the bank announced a series of changes in the mechanism. The bank would give twelve months notice in advance of its intention to withdraw the Commercial Paper Facility, which reflected the bank’s better expectations regarding the economy and the British financial system and expected to sell more corporate bonds relatively. These better results were expected due to the economic recovery after the crisis of 2008, which led the economy to hit bottom in 2009, so in 2010 an economic recovery had started which moved to a better financial system.
There were no major changes until the November 2011 meeting where the committee increased the spending on assets to £275 billion. The committee stressed that the measures were taken to incentivise the growth of the nominal rate of spending and thus achieve the objective of medium-term inflation. In addition, since 2011, the service provider authorises the bank to continue conducting transactions with the private sector even if the transactions have not been met with a monetary policy goal, but it is still the smallest part of the bank’s balance sheet. At the next meeting in the first quarter of 2012, it was decided to raise the asset acquisition ceiling again to £325 billion.
From mid-2012 until the end of that year, the purchase ceiling was increased to £375 billion, financed with central bank reserves. The main objective was to influence the supply of money and access to credit so that the expense would grow in the United Kingdom to meet the inflation target. In a report issued in 2013 by the MPC, hints were given on how the path of monetary policy would be in the future.
The committee expressed that they would not reduce the stock of purchases of assets financed by the issuance of central bank reserves, so it would reinvest the cash flows associated with the maturation of its assets until the desired level of unemployment was reached. The committee concluded that the purchases of assets would continue until the unemployment rate reached rates similar to the objectives of the bank and the British government.
The next clue that the committee gave was on the 12th of February 2014, where the desired unemployment threshold had already been reached for the committee. The Monetary Policy Committee communicated that it would maintain that level of assets without major change until the decision was made to increase the interest rate up to 0.5%. In its 2014 reports, the MPC expressed its preference to use the interest rate as the main tool of monetary policy given its greater scope in the economy.
Therefore, in the 2015 report of the bank’s balance sheet, the committee stated that they would continue to maintain the amount of assets in a stable manner until they were sure what the best decision would be regarding the interest rate, without giving clues about what the direction that monetary policy would take. It is concluded that the Bank of England like many central banks see the modification of the balance sheet as a support for the main tool that is the interest rate.
On the 4th of August 2016, the MPC voted in favour of introducing a package of measures designed to provide an additional monetary stimulus with a purchase of corporate bonds for amounts up to £10 billion. In addition, a financing plan was introduced to provide liquidity in instalments for banks at rates close to the bank rate in order to reinforce the transmission of rate reductions faced by households and businesses in the United Kingdom.
In addition, the target for the stock of purchases of UK government bonds increased to £435 billion. In the next two graphs, you can see the evolution of the balance sheet of the bank since the creation of the fund and in the second you can see the variation of the most representative assets, the gilts.
Graph 64. The stock of APF Holdings.
Graph 65. Gilts
Analysing the global situation of the normalisation of the balance sheet of the banks, it was expected that at some point the acquisitions by the Bank of England would not continue. In addition, if the reports issued since 2009 are analysed, it can be observed which were the key variables that led the bank to continue injecting liquidity into the market to incentivise spending and achieve the inflation target.
- The unemployment rate did not show figures that eased the feelings of the Bank of England
- The financial system in the first years after the crisis showed a weak and fragile behaviour
- In the 2014 and 2015 reports, the committee estimated that the acquisition of assets would stagnate until the interest rate increased. But in 2016 with the elections on the permanence of the United Kingdom in Europe, it was not possible to stabilise the number of assets.
- The use of the bank’s balance sheet to affect some macroeconomic variables while determining the correct monetary policy using the interest rate.
If the comments of the committee are taken into account in the last meetings of 2017, it is observed that:
- The unemployment rate is one of the lowest in recent decades.
- The inflation rate is above the bank’s objective.
- Short-term stabilisation in the economy growing at low rates, but without much volatility.
- Increase in the interest rate at the November meeting.
With these variables, it would be realistic to expect a normalisation of the bank’s balance sheet due to the fact that the variables that have generated an increase in the acquisition of assets have normalised over time. But like other banks such as the FED, normalisation would be slow so as not to generate shocks in the economy, thus achieving results such as the reduction of inflation. But since the normalisation of the balance sheet is slower than the acquisition of assets, these types of policies will not have the same effects. In addition, with each quarterly report, investors and the market, in general, will be able to adapt to the measures taken by the central bank.