Treasury Letter - April 2010

HM TREASURY

Correspondence & Enquiry Unit
Public.enquiries@hm-Treasury.gov.uk

A Baron,

93c Venner Road,

Sydenham,

London, SE26 5HU

Dear A Baron,

1 Horse Guards Road

London

SW1A2HQ

Our reference: 10/69579/2010

Thank you for your letter dated 8 March about quantitative easing. As it is not
practical for Ministers to respond to all the letters they receive, I have been asked
to reply on their behalf.

As you mention in your letter, with the Chancellor's authonsation, the Bank of
England has undertaken a programme of asset purchases financed by the creation
of central bank reserves totalling £200 billion. It is important to stress that the
Monetary Policy Committee (MPC) of the Bank of England has operational
' tndependente over^mcrnetary poHcy, and pursues^an objecttveof ma^tarnrngprfce-
stability - as defined by a 2 per cent annual nse in CPI inflation - and, subject to
that, to support the Government's economic policy.

The severity of the global downturn created strong deflationary pressures on the
economy, and having cut Bank Rate to 0.5 per cent, the MPC decided that further
action was needed to counter the risk of deflation. Asset purchases financed by
the issuance of central bank reserves have allowed the MPC to ease monetary
conditions further by raising the quantity of money in circulation at a time when it
has not been feasible to reduce further the price of money. The stock of past
purchases, together with the low level of Bank Rate, will continue to impart a
substantial monetary stimulus to the economy for some time to come.

The vast majonty of the Bank of England's purchases through the Asset Purchase
Facility (APF) have been of government bonds, known in the UK as gilts. Article
1 04(1 ) of the Maastricht Treaty forbids EU member states from printing money to
finance their deficit. However, the Bank of England has been purchasing gilts in
the secondary market. Central banks routinely buy and sell government debt in
the secondary market as part of their normal operations in the money markets,
and such operations are not deemed to amount to monetary financing under the
Maastricht Treaty. Quantitative easing differs from these normal operations only in
their scale and the length of time for which the assets are likely to be held. It is
important to emphasise that the MPC is undertaking these asset purchases for
monetary policy purposes and not for fiscal policy purposes.

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v.

INVESTOR IN PEOPLE

Crucially, however, the APF has been designed to enable the MPC to withdraw the
additional monetary policy stimulus as the medium-term outlook for inflation
picks up. Assuming the economy strengthens in line with the Budget forecast, it
will be appropriate and necessary to withdraw some of the monetary stimulus in
place. The MPC will determine the appropriate combination of increasing Bank
Rate and the sale of assets under the APF. The MPC's flexibility with regard to
withdrawing this additional monetary stimulus would be considerably impaired
were the newly-created central bank reserves to be used as government spending
in the manner in which you suggest.

Thank you for your correspondence, and I hope you find this reply helpful.

Yours sincerely,

Richard Curtis

Macroeconomic Coordination and Strategy

HM Treasury