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2 June 2000

QUARTERLY REPORT ON UK OFFICIAL HOLDINGS OF FOREIGN CURRENCY AND GOLD: JANUARY - MARCH 2000

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 2000. 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 $31.58 billion at end-March, with a small underlying decrease of £7 million on end-December 1999. After the annual revaluation the reserves stood at $30.46 billion.

The level of the Bank of England's holdings of foreign currency and gold was $9.12 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.

As part of the improvements to the publication of information on UK foreign currency reserves announced on 28 April the Quarterly Report is being discontinued and this Report is the last to be published. All of the information in this report will be available in other publications.

Notes to Editors

1. Media copies of the quarterly report are available from the Treasury Press Office on 020 7270 5238 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. As announced on 28 April in Treasury Press Notice 57/00 the Quarterly Report on the UK Official Holdings of Foreign Currency and Gold is being discontinued as the information it was designed to provide is now published in the Treasury's monthly press notice, the IMF template published on the Bank of England's web-site and in the Bank of England's Quarterly Bulletin.

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External links

• Bank of England

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

JANUARY - ­ MARCH 2000

This report contains a short commentary on foreign exchange market developments during the three months January ­ March 2000 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

Sterling appreciated over the quarter in effective terms. The dollar appreciated sharply against the euro and, to a lesser extent, against sterling and the yen. The yen was volatile, and depreciated slightly over the period in effective terms. The euro continued to depreciate.

Sterling developments

2. Sterling appreciated over the period in effective terms by 2.3%. Within this movement, it appreciated by 3.6% against the euro (which has a 65% weight in sterling's effective exchange rate) but depreciated against the dollar and the yen by modest amounts (see Table A).

Table A: Exchange rates & effective exchange rate indices

Source: Bank of England * change in £/euro

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International developments

3. The US dollar's effective exchange rate appreciated by 1.9% over the quarter, reflecting a 4.7% appreciation against the euro and smaller appreciations against sterling and the yen.

4. Following a rise of over 18% over the previous six months, the Japanese yen's effective exchange rate depreciated slightly over the quarter.

5. The euro continued to depreciate over the period, falling by 4.5% against the dollar, 3.6% against sterling and 4.4% against the yen. In effective terms, the euro depreciated by 3.3% in the first three months of 2000, following its 4.4% fall in the previous quarter.

6. Gold traded in a wide range in 2000 Q1. Having traded between $ 280 and $ 290 per ounce through January, it rose sharply in early February, reaching highs over $ 320, as a number of mining companies announced reduced hedging activity. The price slipped back in March, returning to the range seen in late 1999.

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

7. 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. As a result of differences in accounting methodology that are explained in the footnotes to the tables, and the different purposes for which the assets are held, no overall total for the EEA and Bank holdings is shown.

EEA Holdings

8. 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 2000 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 $ 30,455mn, as compared with $ 31,575mn on a pre-valuation basis.

9. As shown in Table 1, the total of foreign currency and gold reserves in the EEA fell, on a pre-valuation basis, by $ 1,478mn from the end-December figure of $ 33,053mn to $ 31,575mn at end-March. The reduction was more than accounted for by Capital and Other Items totalling $ 1,485mn(1). The underlying change in the reserves, that is the change net of Capital and Other Items, was an increase of $ 7mn. If translation to US dollars had been carried out at prevailing market rates rather than at the parity rates set at end-March, the total of gold and foreign currency reserves in the EEA would have been $ 34.2bn at end-December and $ 31.9bn at end-March. The difference between the total at prevailing market rates and at parity rates is primarily due to the 25% discount applied to the value of gold at end-March in calculating the reserves at parity rate.

10. 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.

11. 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.

12. In January, the UK issued the third note under its Euro Note programme. Euro 500mn of the 4.75% 2003 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 2bn 4% 2000 Note was repaid in January. The total of Euro and ECU Notes and bonds outstanding with the public therefore fell from euro 8.5bn to euro 7bn during the quarter. On 21 March it was announced that the Bank of England would take over as the issuer of Euro Notes with effect from January 2001 (see paragraph 17 below). Repayments of non-marketable debt are shown in Note 6 to the EEA tables.

13. On 7 May 1999, HM Treasury announced a restructuring of the UK's reserves involving a programme of five gold auctions in the financial year 1999/2000. Two auctions in this programme took place in the quarter, on 25 January and 21 March 2000. Twenty-five tonnes of gold were sold at each auction. The auction on 25 January achieved a price of $ 289.50; that on 21 March achieved a price of $ 285.25. Plans for gold sales in the financial year 2000/01 were announced by HM Treasury on 3 March 2000. Further details about the programme are available from the Treasury and Bank of England press offices and their respective web sites.

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Bank of England Holdings

14. The Bank of England's holdings of foreign currency and gold stood at $ 9,123mn 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 $ 212mn at end-March. The gross amount at end-March was $ 28,509mn.

15. 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 $ 1,031mn. However, there was no underlying change during the quarter. The underlying change excludes the change in valuation over the quarter, 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 and asset swaps conducted in the course of the Bank's money market operations and in connection with TARGET, changes in euro balances with other central banks operating the TARGET system, and other capital item.

16. The Bank of England continued to issue euro 1bn of Euro Bills in each of the three months during the quarter, comprising euro 200mn of one-month, euro 500mn of three-month and euro 300mn of six-month Bills. The total nominal amount of Bank of England Euro Bills was therefore maintained at euro 3.5bn throughout the quarter. The proceeds of Bank of England Euro Bills are 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.

17. On 21 March it was announced that the Bank of England would take over as the issuer of 3-year Euro Notes with effect from January 2001. Apart from the change in issuer, the other main features of the Note programme (which will thereafter be known as the Bank of England Euro Note programme) will remain unchanged. Further details will be announced, and a new Information Memorandum issued, prior to the first auction of the Bank of England Euro Notes in January 2001. The proceeds from the issue of the Notes will be held on the Bank's balance sheet as foreign currency assets.

18. As set out in the Chancellor's letter of 6 May 1997 to the Governor, the Bank may 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.

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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

1 The end-March 2000 figure has been revised

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TABLE 2: BREAKDOWN OF ASSETS AND LIABILITIES AT END MARCH 2000

EEA PRE-REVALUATION USD mn at (old) parity rates

EEA POST-REVALUATION USD mn at (new) parity rates

2 Includes residual balances denominated in the predecessor currencies of the euro.

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 $ 7bn; and three Euro Notes and an ECU bond totalling euro 7bn ($ 6.7bn equivalent). 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 current 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 2000 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 2000 is US$ 207.56 per troy ounce.

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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 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:

• There were repayments of $ 28mn of public sector borrowing for which HMG has provided an exchange rate guarantee under the Exchange Cover Scheme (ECS);
• Capital repayments of HMG ECU Treasury Notes maturing exceeded receipts from the Euro Notes issued by $ 1,582 mn.

7. The underlying change also excludes the difference between the valuation of the gold auctioned on 25 January and 21 March at the parity rate of $ 209.59 per troy ounce and the auction allotment prices ($ 289.50 and $ 285.25 per troy ounce, respectively). These amount to $ 125mn in total.

8. 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.

The report is to be discontinued as the information it was designed to provide is now published elsewhere. 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.

3. 1 See Note 6 to the EEA Tables.

4. 2 Includes residual balances denominated in the predecessor currencies of the euro.

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Press Notices 2000 January to June index