As a result, in order to protect their margins banks may not reduce the rate they charge on lending, thus dampening the transmission of monetary policy. The MPC was acutely aware of this when it decided at the beginning of this month to reduce Bank Rate to 0.25%. In order to reinforce the transmission of this change we also launched a Term Funding Scheme (TFS) through which central bank reserves will be lent to banks and building societies for four years. Should they maintain their lending to the real economy, the rate they will pay over this period will be Bank Rate. For each 1% that net lending by an institution falls, the cost of TFS funding will rise by 5bps to a maximum of 25bps. By tethering banks’ term funding costs more closely to our official policy rate, this should create the capacity for them to pass the reduction in that rate through to households and businesses, thus strengthening the transmission to the real economy. Since the MPC’s decision we have published further documentation, technical detail and guidelines for firms considering using this facility. We are now open to applications, and the scheme will be available to be drawn upon from the middle of September. Conclusion Let me summarise. Darell and Arvind’s paper draws attention to some very important issues, namely the decrease in competitive forces and increase in frictions in money markets, which work to reduce the pass-through efficiency of the Federal Reserve’s monetary policy setting.
And the behaviour of the index of dispersion of money market rates that they have created provides evidence that these developments are at least in part due to post-crisis changes in the regulatory framework. Taking into account the improved resilience of the financial system, these regulatory changes are net beneficial to society, so they are not going to be rolled back. However, policymakers can and should be willing to attenuate some of their unintended consequences, and be open to challenge on their design. As participants in money markets, central banks should be open to new ways to enhance pass-through efficiency by showing flexibility in their implementation of monetary policy. The Fed’s RRP does this by making a risk-free asset available to a wider range of counterparties  5  SONIA is the weighted average of unsecured brokered transactions, and it is the main reference rate in OIS contracts. Current daily volumes are around £ down from around £ before the financial crisis. In July 2015 the Bank announced its plans to reform SONIA, including by broadening its coverage to encompass overnight unsecured transactions negotiated bilaterally aswell as those arranged via brokers. For more information see http://www.bankofengland.co.uk/markets/Pages/benchmarks/soniareform.aspx. BIS central bankers’ speeches  5  than would ordinarily be the case. And the Bank of England’s recently launched TFS will help the pass-through of very low levels of Bank Rate to the rates faced by households and businesses in the real economy.