On 9 November 2012, the UK Government agreed with the Bank of England to transfer to the Exchequer the excess cash held in the Bank's Quantitative Easing (QE) facility.
This will align the cash management arrangements for the facility with normal government practice and with the approach followed by other countries undertaking QE. On 9 November 2012, the Chancellor of the Exchequer and the Governor of the Bank of England exchanged letters agreeing the cash management arrangements (see BoE link).
Since 2009, the Bank of England has operated QE by buying gilts and holding them in a dedicated facility called the Asset Purchase Facility (APF). These gilts attract regular coupon payments from the Exchequer. With the purchases of the APF having reached £375 billion, this Facility has now accumulated a large cash balance. As the scale and likely duration of the scheme has increased significantly since its inception, it makes sense to normalise the cash management arrangements for the APF.
From now on, this excess cash will be transferred to the Exchequer on a regular basis. This will improve transparency and align practices with those of major central banks like the United States Federal Reserve and the Bank of Japan.
These changes will end the current arrangement which requires the Government to borrow money to fund coupon payments to the Bank of England. Holding large amounts of cash in the APF is economically inefficient as it requires the Government to borrow money to fund these coupon payments.
At some point in the future, as monetary conditions normalise, it is likely that the cash flows will need to be reversed. Return payments from the Government to the APF may be necessary to meet shortfalls in the APF’s net income as the Bank Rate rises, or capital losses on its gilt holdings as the Monetary Policy Committee unwinds QE. The previous Government agreed that any future losses incurred by the APF will be met in full by the Government. For this reason, any net coupon income transferred from the APF to the Exchequer should be used solely to pay down government debt.
These changes will have no effect on the Monetary Policy Committee’s ability to set monetary policy: the APF remains fully indemnified by the Treasury and all future gains or losses are due to the Treasury.
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