Monetary policy in the UK

Monetary Policy Remit

The Bank of England Act 1998 requires the Treasury to specify at least once every 12 months how price stability should be defined and what the economic policy of the Government consists of. This is the monetary policy remit, which the Chancellor specifies in a letter to the Governor of the Bank of England.

2013

Monetary policy has a critical role to play in supporting the economy as the Government delivers on its commitment to necessary fiscal consolidation. To ensure that it can continue to play that role fully, the Government has reviewed the monetary policy framework in international and historical context. This Review of the monetary policy framework is published alongside Budget 2013.

Review of the monetary policy framework (PDF 590KB)

As a result, the Government has updated the remit for the Monetary Policy Committee. The Government has:

retained a flexible inflation targeting framework and reaffirmed the 2 per cent inflation target, which applies at all times;
updated the remit to clarify the trade-offs that are involved in setting monetary policy to meet a forward-looking inflation target; and
requested that the Monetary Policy Committee (MPC) provides in its August 2013 Inflation Report an assessment of the merits of using intermediate thresholds – policy commitments conditional on future economic developments – in the operation and communication of monetary policy.

Letter from the Chancellor of the Exchequer to the Governor of the Bank of England 20/03/2013 (PDF 100KB)

2012

Letter from the Chancellor of the Exchequer to the Governor of the Bank of England 21/03/2012 (PDF 746KB)

2011

Letter from the Chancellor of the Exchequer to the Governor of the Bank of England 22/03/2011 (PDF 705KB)

Asset Purchase Facility

The Asset Purchase Facility (APF) was announced on 19 January 2009 with the objective of increasing the availability of corporate credit, in order to support the Bank of England’s responsibilities for financial stability and monetary stability in the UK. At the request of the Monetary Policy Committee (MPC), the APF was expanded on 3 March 2009 to enable the MPC to use it for monetary policy purposes, financing asset purchases by the issuance of central bank reserves, in order to meet the inflation target in the medium term.

Cash management operations

On 9 November 2012, the Government published letters exchanged between the Chancellor of the Exchequer and the Governor of the Bank of England on the cash management operations of the APF.

APF ceiling

On 5 July 2012, the Government published letters exchanged between the Chancellor of the Exchequer and the Governor of the Bank of England that authorise the MPC to increase the ceiling on the scale of asset purchases through the APF financed by the issuance of central bank reserves.

On 9 February 2012, the Government published letters exchanged between the Chancellor of the Exchequer and the Governor of the Bank of England that authorise the MPC to increase the ceiling on the scale of asset purchases through the APF financed by the issuance of central bank reserves.

On 29 November 2011, the Government published letters exchanged between the Chancellor of the Exchequer and the Governor of the Bank of England that reduce the maximum APF limit for purchases of eligible private sector assets by £40 billion to a ceiling of £10 billion, financed by the issuance of central bank reserves, Treasury Bills and the DMO’s cash management operations.

On 6 October 2011, the Government published letters exchanged between the Chancellor of the Exchequer and the Governor or the Bank of England that authorise the MPC to increase the ceiling on the scale of asset purchases through the APF financed by the issuance of central bank reserves.

Previous letters relating to the Asset Purchase Facility can be found on the National Archives website (opens in new browser window)

Open letters

The remit for the Monetary Policy Committee (MPC) continues to require an exchange of open letters between the Governor of the Bank of England and the Chancellor of the Exchequer if inflation moves away from the target by more than 1 percentage point in either direction. The Government believes that the open letter system, required in the remits for the MPC since 1997, provides a formal mechanism of transparency and accountability in the event of any appreciable deviations from target.

The remit set at Budget 2013 now requires that the open letter from the Governor should be sent alongside the minutes of the MPC meeting that followed the publication of the CPI data and referring as necessary to the Bank’s latest Inflation Report and forecasts, covering the MPC’s judgements on the trade-offs inherent in setting monetary policy. The reason for publishing this letter alongside the minutes is to allow the MPC time to form and communicate its strategy towards returning inflation to the target after consideration of the trade-offs. The Government believes that any future open letters will therefore result in a more meaningful exchange about the MPC’s strategy than has been possible before now. As has been the case since 1997, the Governor is required to send a further letter after three months if inflation remains more than 1 percentage point above or below the target. The Governor’s letter should set out:

the outlook for inflation and the reasons why inflation has moved away from the target or is expected to move away from the target;
the policy action the Committee is taking in response;
the horizon over which the Committee judges it is appropriate to return inflation to the target;
the trade-off that has been made with regard to inflation and output variability in determining the scale and duration of any expected deviation of inflation from the target; and
how this approach meets the Government’s monetary policy objectives.

On 13 February 2012, the Governor wrote to the Chancellor about the CPI inflation rate for January 2012 of 3.6 per cent. The Chancellor replied on 14 February 2012.

On 14 November 2011, the Governor wrote to the Chancellor about the CPI inflation rate for October 2011 of 5.0 per cent. The Chancellor replied on 15 November 2011.

On 15 August 2011, the Governor wrote to the Chancellor about the CPI inflation rate for July 2011 of 4.4 per cent. The Chancellor replied on 16 August 2011.

On 16 May 2011, the Governor wrote to the Chancellor about the CPI inflation rate for April 2011 of 4.5 per cent. The Chancellor replied on 17 May 2011.

On 14 February 2011, the Governor wrote to the Chancellor about the CPI inflation rate for January 2011 of 4.0 per cent. The Chancellor replied on 15 February 2011.

On 15 November 2010, the Governor wrote to the Chancellor about the CPI inflation rate for October 2010 of 3.2 per cent. The Chancellor replied on 16 November 2010.

CPI inflation in July 2010 remained above 3 per cent, prompting an open letter from the Governor to the Chancellor on 16 August 2010. The Chancellor replied to the Governor on the 17 August 2010.

On 17 May 2010, the Governor wrote to the Chancellor about CPI inflation for April 2010 being more than one percentage point above target. The Chancellor replied on 18 May 2010.

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