Asset Purchase Facility

In January 2009, the Chancellor of the Exchequer authorised the Bank to establish the Asset Purchase Facility (APF) to buy high-quality assets financed by the issuance of Treasury Bills. The aim of the Facility was to improve liquidity in credit markets. The Chancellor also announced that the APF could provide an additional tool that the Monetary Policy Committee (MPC) could use for monetary policy purposes.

On 17 February, the Governor of the Bank of England set out in a letter to the Chancellor the MPC's case for using the Asset Purchase Facility for monetary policy purposes. The Chancellor replied to the Governor on 3 March to authorise purchases to be made for monetary policy purposes. When the APF is used for this purpose, purchases of assets are financed by the Bank of England creating central bank reserves, rather than by issuing Treasury Bills.

In March 2009, the Monetary Policy Committee announced that, in addition to setting Bank Rate at 0.5%, it would start using asset purchases to inject money directly into the economy in order to meet the inflation target. Influencing the quantity of money directly through the purchase of assets is essentially a different means of reaching the same end – to meet the inflation target of 2 per cent. Read more on Monetary Policy on the Bank of England's website (opens in a new browser window)

Significant reductions in Bank Rate have provided a large stimulus to the economy but as Bank Rate approaches zero, the scope for making further reductions is limited. The MPC has therefore decided that it needs to provide further stimulus to support demand in the wider economy. If spending on goods and services is too low, inflation will fall below its target. The MPC is boosting the supply of money by purchasing assets like Government and corporate bonds. This extra money should support more spending in the economy to bring future inflation back to the target.