3.2.4.3 - Money, credit and monetary instruments

Influencing money and credit

The Bank of England influences broad money and credit conditions without directly choosing the quantity of every commercial bank loan.

Commercial banks create deposits when they lend, and principal repayment can reduce deposits. Bank Rate influences funding costs, lending rates and borrowers' willingness to take loans. Easier policy can support credit and deposit growth if banks are willing to lend and creditworthy households and firms want finance. Tighter policy can reduce new borrowing and money growth. The relationship is behavioural: there is no fixed automatic conversion from an extra pound of reserves into a particular amount of loans.

The Bank can also supply reserves through lending operations against eligible collateral, supporting settlement and liquidity. These operations help implement monetary policy and maintain functioning markets. Banks do not lend their central-bank reserve balances directly into households' current accounts; reserves settle payments between eligible institutions, while bank deposits are the money customers spend.

Quantitative easing, funding schemes and communication can influence wider borrowing costs and asset markets even when a further policy-rate cut has limited room to work. Instruments can affect sterling as investors revise relative returns and expectations, but none guarantees a particular exchange rate. Greater money balances only increase nominal spending if their holders use them; real output then depends on spare capacity. With severe supply constraints, extra spending is more likely to raise prices. With weak confidence, it may be saved or used to repay debt.

Quantitative easing

Quantitative easing purchases financial assets using newly created central-bank reserves to influence financial conditions and spending.

In an illustrative purchase from a pension fund, the Bank buys an existing government bond. The pension fund's commercial bank credits the fund's deposit account; that bank receives reserves at the central bank. The fund now holds a deposit instead of the bond. When the seller is a non-bank, this transaction can increase broad money as well as reserves. An asset purchase directly from a bank need not create a matching new non-bank deposit. The distinction prevents treating reserves and broad money as interchangeable.

Purchases increase demand for bonds, tending to raise prices and lower yields. Investors who sold bonds may buy other assets, raising their prices and lowering companies' financing costs. Lower longer-term borrowing costs can encourage consumption and investment; higher asset values can support spending through wealth or collateral. Increased AD can raise output and employment when there is spare capacity and help bring below-target inflation towards target. Purchases may also signal that monetary conditions will remain supportive. These channels explain the intended effect; success does not require each bank to mechanically lend a fixed multiple of its reserves.

Dated UK evidence: the Bank first used QE in March 2009. Further rounds included responses to the 2016 referendum and the 2020 pandemic; its explainer, updated 5 December 2025, states that the last increase in the QE programme was announced in November 2020. It distinguishes QE from the reduction of asset holdings begun in 2022, commonly called quantitative tightening (QT), through maturities without replacement and sales. These are historical programme dates, not a claim about the latest stock or today's decision. Source: Bank of England, Quantitative easing.

QE may be less powerful if recipients hold deposits, banks repair balance sheets, or firms expect poor sales. Asset owners can receive immediate wealth gains while employment benefits reach other households through different channels. Evaluation must examine both, rather than assuming an asset-price rise benefits everyone equally. Reversing purchases changes asset supply and reserves, but its market effect need not be equal and opposite in every economic environment.