4  All speeches are available online at www.bankofengland.co.uk/speeches  4  Quantitative Easing (QE) involved buying gilts in exchange for newly-created reserves, via a specially created account called the Asset Purchase Facility (APF) which carries an indemnity from the Treasury. 7  The goal was to reduce the yield on gilts, and so to reduce yields – and therefore borrowing costs – on other financial assets, which would in turn feed through to support the economy. This created a large additional quantity of central bank reserves – currently £ worth – matched by an equally large loan to the APF on our balance sheet. 8  Importantly, QE also changed the quantity of reserves from being determined by the quantity demanded by financial institutions to being determined by the quantity supplied by the Bank on behalf of the MPC. To accommodate this change, and to deal with the volatility of money market rates which had emerged as liquidity patterns changed, we also changed our framework for controlling interest rates. In 2009 the Bank moved from a corridor system, in which banks’ reserve balances were remunerated at Bank Rate up to a limited amount, to a floor system, in which we remunerate all balances, no matter how large, at Bank Rate. As well as QE, the MPC has used the Bank’s balance sheet to lend directly to banks, via the Term Funding 9  Scheme (TFS) in 2016.
Given its proven success at maintaining market rates in line with Bank Rate, as well as the benefits of operational continuity, the Bank is minded to keep using a variant of the current floor system for controlling market rates. And, as the quantity of reserves supplied falls towards the quantity demanded by market participants, we will stand ready to meet SMF participants’ demand for additional reserves through regular open market operations. In addition, there is a strong case for holding some longer maturity assets, such as gilts, to back the stable portion of demand for banknotes, and indeed we had already started to do this ahead of the financial crisis. 29  How large a quantity of reserves SMF participants will demand, and therefore how large our future balance sheet will be, is an open and difficult question. As well as changing our own monetary policy toolkit, the financial crisis has changed the behaviour of financial institutions, including in ways that are significant for the size of our balance sheet. In particular their demand for reserves and for liquid assets more generally, is much greater than it was before the crisis. That reflects a combination of tighter regulation which requires them to hold larger buffers of liquid assets, and more prudent management which means that banks have learnt the lessons of the crisis and the value of maintaining liquidity, as well as the fourfold increase in the number of SMF participants. This change was not caused by QE and the expansion of our balance sheet.