The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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March 20, 2009

A look at the Bank of England’s balance sheet

The current financial crisis is global in scope, with central banks responding in various ways to mitigate the strains in their respective countries. The Federal Reserve is not the only central bank that has been aggressive in its response. For instance, the Bank of England's (BoE) Monetary Policy Committee, in its March 5 policy statement, explained the details of its new asset purchase program:

"…the Committee agreed that the Bank should, in the first instance, finance £75 billion of asset purchases by the issuance of central bank reserves. The Committee recognised that it might take up to three months to carry out this programme of purchases. Part of that sum would finance the Bank of England's programme of private sector asset purchases through the Asset Purchase Facility, intended to improve the functioning of corporate credit markets. But in order to meet the Committee's objective of total purchases of £75 billion, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts."

Thus, the BoE will purchase £75 billion of assets (approximately U.S. $108 billion as March 20 and U.S. $106 billion as of March 5), mostly intermediate-to-longer dated U.K. sovereign debt (or gilts) but also some "investment grade" corporate bonds. Along with this new asset purchase program, to ease strains in credit markets the BoE has previously implemented other efforts, such as purchasing commercial paper, asset-backed securities, and corporate bonds. But these earlier efforts were conducted in such a way that the BoE sterilized its purchases—that is, for every £1 of private assets it purchased, the BoE would issue £1 of its own debt (sterling bills), with the effect being that the money base (bank reserves plus currency in circulation) grew much less than the overall size of the balance sheet.

However, with the new asset purchase program, the BoE is targeting a quantity of U.K. sovereign debt to purchase in an unsterilized manner, hence the key phrase "by the issuance of central bank reserves." As stated, the BoE will be buying gilts, "with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target [2% CPI inflation] in the medium term."

The impact of the BoE's efforts to support private credit markets can be seen in this chart of the size and composition of the BoE's assets:


As the size of the asset side of the BoE's balance sheet grew, so did the liability-side:


Notice that much of the increase in the liabilities has come from "other liabilities" and "short-term open market operations" and not "reserve balances." But with the new asset purchase program, reserve balances will become much larger.

By Laurel Graefe and Andrew Flowers, economic analysts at the Atlanta Fed.

March 20, 2009 in Europe , Monetary Policy | Permalink


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It never occurred to me that quantitative easing, if successful, could be sterilized.

The entire point of quantitative easing is to put assets into the economy that increase the money supply - whether through expanding the quantity of money, or increasing the velocity of money. The former BoE actions did not increase the quantity of currency notes - as said, for ever pound sterling that comprised asset purchases, a pound of sterling was taken out of the economy. They should, however, have increased the velocity of money, by ridding the system of systemic risk. Whether the BoE achieved this is certainly controversial, but doubtless it was their intent in this massive purchase. So, if quantitative easing did occur, then it could not have been sterilized - i.e., the money supply expanded.

Alternatively, sterilization could remain a useful term if defined as an expansion of the money supply strictly through efforts to increase velocity, rather than through the more common route of increasing the quantity of money.

As a tangential thought, it's possible that the BoE's 'sterilization' policy actually contracted the money supply, if the routes through which they took in pound sterling had a higher propensity to spend than the routes through which they issued sterling (i.e. the banking sector). As all the banks are currently holding on to money like Scrooge McDuck, I wouldn't be surprised it this was the case. Perhaps that explains their current policy transformation to unsterilized asset purchases, which face no propensity to spend tradeoff.

fischer out~

Posted by: fischer | March 23, 2009 at 02:47 PM

BoE will probably go for lagged sterilization. I.E. As soon as it sees inflation back pushing above the target level, it will sell off the assets it's bought. That's the idea, anyhow.

Posted by: Bill Petrie | April 03, 2009 at 02:33 PM

Assuming a contraction of credit is near permanent (reserve requirements / a generation of bankers realise risk exists), then maybe the need to sterilise is eliminated. And voila, not only has HMG had its deficit funded, but when its banking assets are sold it will make a profit. We maybe a lot better off than we thought.

Posted by: Simon E | October 27, 2009 at 04:14 PM

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