Letter from the Governor of the Bank of England to the Chancellor of the Exchequer 03/02/2022

The Rt Hon Rishi Sunak Chancellor of the Exchequer HM Treasury Horse Guards Road London SW1A 2HQ

February 3, 2022

Dear Rishi,

At its meeting which ended on February 2, 2022, the Monetary Policy Committee (MPC) voted to raise the Bank Rate to 0.5% and to start reducing stocks of UK government bonds and high quality non-financial corporate bonds held in the Asset Purchase Facility (APF). The details of these decisions and their impact on the functioning of the APF are presented below.

The use of the APF for monetary policy

In line with MPC guidance set out in the August 2021 Monetary Policy Report [^1], the committee agreed at its February meeting that the Bank of England should stop reinvesting future maturities due on its stock of UK government bond purchases. This reflects the MPC’s intention to reduce its holdings of government bonds in a gradual and predictable manner.

The first reduction in the stock of purchased UK government bonds will therefore take place in March 2022, when £27.9 billion of gilts held by the APF will mature. In total, over 2022 and 2023, just over £70 billion of gilts held by the APF will mature, and over 2024 and 2025 around a further £135 billion will mature. The details of these maturities are presented in the appendix to this letter and the complete profile of the maturities of the gilts held by the APF is available on the Bank’s website, which will be kept up to date to ensure that the public and the financial markets have clear information on how these deadlines will impact the size of the APF [^2].

In addition, the committee agreed at its February meeting that the Bank of England should cease reinvesting the maturing maturities of its stock of sterling non-financial investment grade corporate bonds and that it is expected to launch a program of corporate bond sales to be completed by the end of 2023 at the earliest, which should fully unwind the stock of corporate bond purchases.

The decision to launch this corporate bond sales program reflects the specific characteristics of the corporate bond market and the MPC’s involvement therein, and should not be taken as a signal regarding the start, size or duration of any future UK government bond sales programme. .

The Committee reiterated that it would only consider commencing the process of actively selling UK government bonds once the discount rate had reached at least 1%, depending on prevailing economic circumstances. The Committee also reaffirmed its preference in most cases for using the discount rate as an active policy tool when adjusting the monetary policy stance. If potential moves in the discount rate are deemed insufficient to achieve the inflation target, or if prevailing conditions are ones in which asset purchases could be particularly effective, reductions in the stock of purchased assets could be modified or cancelled.

Going forward, the general stance of monetary policy will be, as required by the mandate of the Committee [^3]continue to be set to achieve the 2% inflation target and in a way that helps support the government’s economic policy objective of strong, sustainable and balanced growth.

Operational Considerations

As the size of APF’s holdings decreases, the associated state guarantee should also decrease in size. Accordingly, we have agreed that the terms of the indemnity should be adjusted to reflect the size of the portfolio every six months, confirmed by an exchange of letters between us, from April 2022.

Should the MPC find it necessary to resume asset purchases in the future, I expect to notify you and – if necessary – seek a corresponding increase in compensation via a public exchange of letters between us, such as this was the case in November 2020 [^4].

Any decision on whether, when and how to commence gilt sales from the APF will rest with the MPC as part of achieving its statutory purpose. It is a long-standing principle that when a reduction in the monetary stimulus provided by the APF becomes appropriate, the MPC will take all steps to ensure that such a reduction is implemented in an orderly manner. If state sales were deemed appropriate in the future, they would be conducted in a predictable manner over a period of time so as not to disrupt the functioning of financial markets.

As I indicated in my letter of June 18, 2020 [^5]the Bank would liaise with the UK’s Debt Management Office (DMO) to minimize interference with the DMO’s issuance program and consider the views of market participants on how best to minimize disruptions in private asset markets.

As you know, the Bank and HMT also agreed in 2012 [^6] transfer golden coupon payments received by the APF, net of interest charges and other expenses, to the Treasury to facilitate more effective cash management across the public sector. It was recognized that this arrangement would initially result in payments from the APF to the government, and indeed to date a total of £119.7 billion in cash transfers have been made from the APF to HMT. It was also agreed that reverse payments from the government to the APF would likely be required in the future as the bank rate increased and the APF’s gilt holdings were unwound by the MPC, and that these reverse payments would be supported by the government on a regular basis. in right time. Our managers will continue to regularly discuss the size and direction of future cash flows as the portfolio begins to shrink.


Andrew Bailey

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