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87/99

2 June 1999

QUARTERLY REPORT ON UK OFFICIAL HOLDINGS OF FOREIGN CURRENCY AND GOLD: JANUARY - MARCH 1999

The Treasury and the Bank of England published today the Quarterly Report on UK official holdings of foreign currency and gold for the period January to March 1999. The report gives details of the forward foreign exchange position, the currency composition of foreign currency assets, the size and currency composition of foreign currency liabilities for the Exchange Equalisation Account (EEA) and the Bank of England's holdings of foreign currency and gold.

The report shows that the level of the Government's reserves, including the forward book was $35.37 billion at end-March, with no underlying increase on end-December 1998. Net forward holdings of foreign currency were $1.53 billion at end-March. After the annual revaluation the reserves stood at $35.26 billion.

The level of the Bank of England's holdings of foreign currency and gold was $3.76 billion at end-March. No intervention operations were undertaken during the quarter to end-March with either the Government's reserves or the Bank of England's holdings.

NOTES TO EDITORS

1. Media copies of the quarterly report are available from the Treasury Press Office on 020 7270 5185 or from the Bank of England Press Office on 020 7601 4411.

2. Non-media copies of the report are available from the Treasury Public Enquiry Unit on 020 7270 4558 or from the Bank of England on 020 7601 4878.

3. If you have access to the Internet you can find this information at the address below.

4. The quarterly report covering April - June 1999 will be published on Thursday 2 September 1999.

QUARTERLY REPORT ON THE UNITED KINGDOM OFFICIAL HOLDINGS OF FOREIGN CURRENCY AND GOLD

JANUARY ­ MARCH 1999

This report contains a commentary on foreign exchange market developments during the three months January ­ March 1999 and details changes in the level and composition of UK official holdings of foreign currency and gold over that period.

I: FOREIGN EXCHANGE MARKET DEVELOPMENTS

Summary

The most significant development of the quarter was the gradual weakening of the euro after its successful launch. The dollar appreciated on strong economic data from the US. Both sterling and the yen depreciated against the dollar as official interest rates were reduced in the UK and overnight rates fell close to zero in Japan. On a trade-weighted basis against other currencies overall, sterling appreciated over the quarter.

Sterling developments

2. Table A shows that sterling rose by 2.9% on a trade-weighted basis. Sterling fell by 3% against the dollar, but this was more than offset by a 5.4% rise against the euro, which comprises 65% of the exchange rate index. UK official interest rates were reduced twice during the period, by a total of 75 basis points, whilst official interest rates in the euro-area remained unchanged. This, and unexpectedly strong economic data in the United States, were factors in sterling's easing against the dollar. Consistent demand for sterling at the $1.60 level for corporate hedging purposes may have prevented a larger fall. The strengthening of sterling against the euro, despite the narrowing of the gap between official interest rates, reflects the weakness of the euro against all major currencies, which is discussed in the next section.

Table A: Exchange rates and effective exchange rate indices

Source: Bank of England
* Average 1990 = 100
# Change in £ / Euro

International developments

3. Following its successful launch at the end of 1998 the euro has weakened against other major currencies, falling by 8% against the dollar. A number of factors are behind this decline, principally weak economic data from core countries of the euro-area. The emerging crisis in Kosovo may also have reduced the attractiveness of the euro to investors towards the end of the quarter.

4. Unexpectedly strong economic data and growing expectations of a rise in official interest rates later in the year helped the dollar appreciate during the quarter. The yen was less volatile than in the previous quarter, during which it had appreciated sharply. A continuation of that rally in early January was reversed, reportedly by intervention. The currency continued to weaken on market concern over the Japanese economy, and a further de facto easing of monetary policy: overnight interest rates were reduced to 2-4 basis points by the injection of liquidity into the market.

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II: THE LEVEL AND COMPOSITION OF UK OFFICIAL HOLDINGS OF FOREIGN CURRENCY AND GOLD

5. The accompanying tables show the size and composition of the foreign currency and gold holdings of the Exchange Equalisation Account (EEA) and of the Bank of England. Due to differences in accounting methodology that are explained in the footnotes to the tables, no overall total for the EEA and Bank holdings is shown.

EEA Holdings

6. The non-US dollar assets of the EEA are translated to US dollars at exchange rates (termed 'parity rates') that are set at the end of March each year and which apply for the subsequent twelve months. The method of calculation of parity rates, and the level of the major rates, is set out in Note 3 to the EEA Tables. The effect of the revaluation of the EEA holdings in US dollar terms that took place at the end of March 1999 is set out in Tables 1 and 2, which show figures on both a pre- and a post-revaluation basis. Table 1 shows that the total of foreign currency and gold reserves in the EEA after the revaluation at new parity rates at end-March was $ 35,262 mn, as compared with $ 35,365 mn on a pre-revaluation basis. The currency breakdown of the EEA holdings in Table 2 shows that a lower valuation in dollar terms of the EEA's holdings of Euro and of gold was partially off-set by the increased value of yen and SDR-denominated holdings. If translation to US dollars had been carried out at prevailing market rates rather than at parity rates, the total of gold and foreign currency reserves in the EEA would have been $ 40.4bn at end-December and $ 36.9 bn at end-March compared to $ 36.9 bn and $ 35.4 bn respectively at (pre-revaluation) Parity Rates. The difference between the total at prevailing market rates and at post-revaluation parity rates is primarily due to the 25% discount applied to the value of gold for the latter.

7. As shown in Table 1, during the quarter to end-March the total of foreign currency and gold reserves in the EEA fell by $ 1,613 mn on a pre-revaluation basis. The reduction was more than accounted for by Capital and Other Items totalling $ 1,620 mn⁽¹⁾

The most significant factor was the repayment of HMG's 1999 ECU Treasury Note. The underlying change in the reserves, that is the change net of Capital and Other items, was an increase of $ 8 mn.

8. During the quarter the UK's reserve tranche position at the International Monetary Fund increased by $ 1,451 mn to $ 5,097 mn (on a pre-revaluation basis). The largest single factor was the payment of the reserve asset portion of the increase in the UK quota at the IMF as part of the general quota increase. This totalled $ 1,110 mn. The UK contribution to the IMF's General Arrangements to Borrow (GAB) and New Arrangements to Borrow (NAB), which stood at $ 510 mn at end-December 1998, was repaid during the quarter.

9. As set out in the Chancellor's letter of 6 May 1997 to the Governor, if the government so instructs then the Bank, acting as its agent, may intervene in the foreign exchange market by buying or selling the government's foreign exchange reserves. If intervention is undertaken, the quarterly reports will provide details of the amount and date of the intervention and an explanation of why it was undertaken. No intervention operations were undertaken during the quarter to end-March.

10. Foreign currency liabilities, which formally are liabilities of the National Loans Fund rather than of the EEA, are set out in Table 2. Footnote 2 to the EEA tables gives more detail on these liabilities.

11. In January the UK issued the second note under its Euro Note Programme. 500 mn of the 2.75% 2002 Euro Note was sold by tender, and it was announced that sales of further tranches by quarterly tender (in April, July and October) were contemplated. Meanwhile the ECU 2 bn 5% 1999 Note was repaid in January. The total of Euro and ECU Notes and bonds outstanding with the public therefore fell from 8.5 bn to 7 bn during the quarter. In addition tenders totalling 1 bn of Euro Treasury Bills were held each month, comprising 200 mn of one-month, 500 mn of three-month and h 300 mn of six-month bills. The total of Bills outstanding with the public was therefore maintained at the equivalent of 3.5 bn. On 5 January it was announced that the Bank of England would take over as the issuer of Euro Bills during the course of 1999 (see Paragraph 15 below). Repayments of non-marketable debt are shown in footnote 6 to the EEA tables.

12. After the period covered by this report, on 7 May, HM Treasury announced a restructuring of the UK's reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currency. This will involve a programme of auctions of gold from the EEA, with the proceeds being invested instead in foreign currency assets and retained in the reserves. Further details are contained in the Press Notice, which is available from the Treasury and Bank of England Press Offices and their respective web sites.

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Bank of England Holdings

13. The Bank of England's holdings of foreign currency and gold stood at $ 3759 mn at the end of the quarter. These arose from the following operations:

• foreign currency and gold deposits placed with the Bank by overseas central banks and other customers in the course of their banking relationships with the Bank;
• foreign exchange swaps conducted as part of the Bank's domestic sterling money market operations. These swaps are undertaken as a supplement to the Bank's usual money market techniques to provide sterling liquidity to the market, and are purely technical in nature;
• foreign exchange swaps and foreign currency-denominated securities, interest rate swaps and asset swaps undertaken to fund and hedge the euro balances that the Bank holds as a consequence of the UK's connection to the TARGET payments system;
• euro balances with other central banks operating the TARGET system. These are very largely off-set by similar balances that the other central banks hold at the Bank and as a result are shown net in the tables below, where they account for $ 133 mn at end-March. The gross amount at end-March was $ 64,455 mn.14. Under the Bank's accounting methodology holdings of foreign currency and gold are translated to US dollars at prevailing market exchange rates. The overall change in the Bank's holdings of foreign currency and gold during the quarter to end-March was an increase of $ 568 mn. The underlying change excludes the change in valuation over the month, changes in holdings arising from changes in foreign currency and gold deposits placed with the Bank by overseas central banks and other customers, changes due to the net effect of foreign exchange transactions conducted in the course of the Bank's money market operations and in connection with TARGET, and other capital items. There was no underlying change during the quarter.

15. On 5 January the Bank of England announced that during the course of 1999 it intended to take over from HM Treasury as the issuer of Euro Bills. The details are set out in the Bank of England Euro Bill Information Memorandum published on 6 April 1999. Apart from the change in issuer, there are no other changes to the main features of the Euro Bill programme. The first Bank of England Euro Bills were auctioned on 13 April and the Bank will have fully taken over the programme from HM Treasury by October. The proceeds of Bank of England Euro Bills will be used by the Bank to finance the provision of intra-day liquidity, on a secured basis, to participants in CHAPS euro, as part of the arrangements for TARGET.

16. As set out in the Chancellor's letter of 6 May 1997 to the Governor, the Bank may also undertake foreign exchange operations to intervene in support of its monetary policy objective. If intervention is undertaken, the quarterly reports will provide details of the amount and date of intervention and an explanation of why it was undertaken. No intervention operations were undertaken during the quarter to end-March.

TABLE 1: TRANSACTIONS

EEA PRE-REVALUATION USD mn at (old) Parity Rates

EEA POST-REVALUATION USD mn at (new) Parity Rates

BANK OF ENGLAND USD mn at Current Rates

TABLE 2: BREAKDOWN OF ASSETS AND LIABILITIES AT END MARCH 1999

EEA USD mn at (old) Parity Rates

EEA USD mn at (new) Parity Rates

BANK OF ENGLAND USD mn at Current Rates

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Notes to the EEA Tables

1. The EEA's foreign exchange reserves are held in assets of high liquidity and credit quality, for the most part government securities issued by the US, EU countries and Japan. In the management of the EEA the Bank of England also makes use of other financial instruments including interest rate and currency swaps, bond and interest rate futures and sale and repurchase agreements.

2. The bulk of the government's foreign currency liabilities consist of marketable international bonds which generally trade as benchmarks in their sector. At end-March these comprised three US dollar bonds (two fixed-rate and one floating-rate) totalling $ 7 bn; two Euro Notes, one ECU Note and an ECU bond totalling 7.0 bn ($ 7.5 bn equivalent); and 3.5 bn ($ 3.8 bn equivalent) of Euro Bills. The rest of the liabilities consist of remaining non-marketable long-term debt arising from loans made by the US and Canadian governments during World War II, and liabilities arising from the Exchange Cover Scheme, under which HM Treasury undertakes to sell foreign currency to repay local authority and public corporation borrowing from the European Investment Bank and European Coal and Steel Community. There has been no new non-marketable borrowing since the 1980s, and the debt is being gradually repaid under fixed amortisation schedules.

3. The EEA tables have been compiled according to EEA accounting methodology:

• Transactions are accounted for on a cash basis, ie on settlement.
• Assets are valued on an historic cost basis.
• Liabilities are shown at their nominal value.
• Non-US$ foreign currencies are translated to US$ using the average of the relevant dollar exchange rates in the three months up to the end of March each year or using the actual exchange rates on the last day in March, whichever calculation gives the lower US$ value. The major translation rates ("Parity Rates") set for the year beginning 31 March 1999 are shown below. It should be noted that the official reserves figures in the UK Balance of Payments statistics (The Pink Book) are expressed in sterling, with translations done at current market exchange rates.
  

• Gold is valued at the average of the London fixing price for the three months to end-March, less 25%; or at 75% of its final fixing price on the last working day in March, whichever is the lower. The gold price in use during the year beginning 31 March 1999 is US$ 209.59 per troy ounce.

4. Included within liabilities is the UK's allocation of IMF Special Drawing Rights (SDRs). In the event of the winding up of the IMF SDR Department, or in other circumstances, the UK could be obliged to repurchase SDRs to the extent of its allocation. It should be noted that the treatment of the UK SDR allocation in the Pink Book differs. The SDR allocation is shown therein as a memorandum item.

5. Investment income is net income derived from ownership of foreign financial assets, including any capital gain or loss realised on sale. As noted above, income is in general recognised only when it is realised. The exception to this rule in the table is that interest on deposits maturing beyond the quarter date and the accrued interest bought or sold in the forward leg of a repo agreement are shown as forward investment income. As a result of this income recognition policy the published figure may fluctuate considerably from quarter to quarter. It should be noted that this is not the same treatment as in the Pink Book.

6. The underlying change in the spot reserves excludes a number of items, identified as Capital and Other Items, which are included in the overall change:

• Funds repaid on the maturity of HMG's 1999 ECU Treasury Note exceeded receipts from the issue of HMG's 2002 Euro Treasury Note by $ 1,611 million.
• There were repayments of $ 18 million of public sector borrowing for which HMG has provided an exchange rate guarantee under the Exchange Cover Scheme (ECS).
• Receipts from HMG Euro and ECU Treasury Bills issued exceeded repayments on those maturing by $ 8 million.
  
  

7. The underlying change is the result of a variety of transactions, both debits and credits, including, for example, transactions for Government departments, transactions with other central banks, and interest receipts and payments. For these reasons, the underlying change should not be taken as an indication of market intervention.

Notes to the Bank of England Tables

1. These tables have been compiled on the basis of the Bank of England's accounting policies. In particular the following should be noted:

• Assets and liabilities in currencies other than US$ are translated to US$ at the exchange rates ruling at the end of the quarter.
• Gold is valued at current market rates on the basis of the London fixing price, without discount.
• Investment income is recognised on an accruals basis, and is displayed here net of interest paid on liabilities. Income accrued in foreign currency that has been exchanged for sterling is excluded from the table.

2. The Bank's foreign currency and gold assets and liabilities are published annually in the Bank's Report and Accounts.

3. The Bank's contribution to the former European Monetary Institute (EMI) of ECU 95 mn (US$ 112 mn at the end-December exchange rate) was repaid on 4 January net of the Bank's contribution to the European Central Bank (ECB) of h 37mn. The Bank's contribution to the EMI had largely been funded by a deposit from the EEA of ECU 93 mn. The deposit from the EEA matured on 26 January.

Data contained in this report and in previous Quarterly Reports is published in The Bank of England's Monetary and Financial Statistics, copies of which may be obtained from the Bank.

1 See Note 6 to the EEA Tables.
2 Includes residual balances denominated in the predecessor currencies of the Euro ('Legacy Currencies').
3 Includes residual balances denominated in the predecessor currencies of the Euro ('Legacy Currencies').

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External links

• Bank of England

Press Notices 1999 January to June index