The Chancellor of the Exchequer (Mr George Osborne)
I am today announcing that the excess cash held in the Bank of England’s Asset Purchase Facility (APF) will be transferred to the Exchequer. This will bring the cash management arrangements for the facility in line with normal Government practice. It will also align the UK’s approach with that of other countries’ whose central banks are undertaking quantitative easing.
As of 8 November, the APF has purchased £375 billion of gilts. The APF has now been operating for longer, and over a larger scale than the original limit of £150 billion. As a result the APF has accumulated a significant cash surplus. At the end of March 2012, the APF held £23.8 billion in cash and this is expected to increase to around £35 billion by the end of March 2013 (based on the stock of gilts purchased of £375 billion).
The net coupon income earned by the APF during 2012-13 will be transferred to the Exchequer during 2012-13. For operational reasons, it is envisaged that excess cash that accumulated in the APF up to the end of 2011-12 will be drawn down during 2013-14. All cash transfers are expected to impact on the central Government net cash requirement. Net coupon flows in future financial years will be settled on a quarterly basis in arrears, starting from financial year 2013-14. As is usual, the Debt Management Office’s financing remit for 2012-13 will be revised at the time of the autumn statement.
These changes will end the current arrangement which requires the Government to borrow money to fund coupon payments to the Bank of England. Holding large amounts of cash in the APF is economically inefficient as it requires the Government to borrow money to fund these coupon payments.
At some stage it is likely that the cash flows from the APF to HM Treasury will need to be reversed, consistent with the terms of the indemnity, as monetary conditions normalise. The Government reaffirm their predecessor’s commitment that any future losses incurred by the APF will be met in full by the Government. For this reason, net coupon income transferred from the APF to HM Treasury should be used solely to benefit the public finances and to reduce debt.
This process has no implications for the Monetary Policy Committee’s ability to set monetary policy appropriately. The APF remains fully indemnified by HM Treasury and any gains or losses are due to the Exchequer.