It provides a new framework for the Bank’s implementation of monetary policy; our operational engagement with the banking system; and for the sterling money markets. I shall spare you the details, but I do want to sketch the main features of the system, by way of underlining that it is directly relevant to you as corporate treasurers. I am keen that you should hear this directly from the Bank. For as long as anyone can remember, a small group of clearing banks – which these days we call ‘settlement banks’ – have had to balance their books with the Bank at the close of business each evening. Volatility resulted if the Bank had not provided pretty well exactly the amount of liquidity the banking system as a whole needed each day; or if our money was not distributed in the money markets to those banks that were short. And traders would speculate on that volatility – perhaps a rare instance of financial market activity with little social utility. The new system relaxes the overnight constraint and liberalises access to the Bank. A broader group of banks – initially just over 40, accounting for around 90% of the UK banking system’s sterling liabilities – will maintain a target balance with the Bank on average over each month. (In the first maintenance period, which started yesterday, the target is just under £ These reserve-scheme banks, and other banks who so choose, also have access to a standing deposit facility and a standing (secured) lending facility.
That was resolved progressively during the 1990s, culminating in the Government’s announcement in 1997 that an operationally independent Bank of England was charged with achieving a clear inflation target. A stable monetary environment has reduced the quite unnecessary risk of self-induced ‘boom and bust’ flipping about demand conditions across the economy as whole. For users of financial markets, the most visible sign of the change was the reduction in yields on conventional government bonds with long maturities, which had previously compensated for high and highly uncertain prospective inflation rates. By ushering in a world with a credible nominal anchor, one source of uncertainty and risk was significantly reduced. The ex post annualised volatility of ten year gilt yields has halved: from over 200 basis points between 1970 and 1997, to under 100 basis points since the current monetary regime was introduced (Table 1). That means that, as corporate treasurers, one source of unavoidable uncertainty about your long-run borrowing costs has been very significantly reduced. The introduction of the new monetary regime did not, and of course could not, remove uncertainty about the quarter-to-quarter, or indeed year-to-year, path of the economy and inflation. And so there remains a degree of unavoidable uncertainty about the short-term path of official rates, as the Monetary Policy Committee responds to cyclical developments. Transparency can reduce that uncertainty, through our making clear what we think is going on in the economy and how, generally, we react to changes in the outlook.