June 21, 2018 / 4:45 PM / 2 years ago

UK government to give Bank of England capital boost

LONDON (Reuters) - Britain’s finance ministry said on Thursday it will pay the Bank of England 1.2 billion pounds to boost the central bank’s capital and let it take greater responsibility for economic stimulus.

FILE PHOTO: Governor of Bank of England Mark Carney sits for the official photo of delegates during the the G7 Finance ministers summit in Whistler, British Columbia, Canada, June 1, 2018. REUTERS/Ben Nelms

As part of the new agreement bit.ly/2McJg50 that makes clearer the financial links between the central bank and the finance ministry, the BoE's capital will rise to 3.5 billion pounds and the central bank will accept full liability for one of its bank lending schemes.

“Today marks a step change in our ability to provide liquidity,” BoE Governor Mark Carney said in a speech after the announcement. “We now have a balance sheet fit for purpose.”

Chancellor Philip Hammond said the transfer of cash to the Bank would not count towards public borrowing, as the BoE is a public-sector body.

In return for the extra money, the Bank will lose a Treasury indemnity against any losses on its 127 billion pound Term Funding Scheme, which it launched in August 2016 to ensure a post-Brexit-vote interest rate cut was fully passed on to borrowers.

Carney said a larger balance sheet would give the Bank greater freedom to launch such schemes in future, and make it easier to start selling off the 435 billion pounds of government bonds it has bought under quantitative easing since 2009.

Earlier on Thursday, the Bank said it would consider selling gilts once it had raised its main interest rate to 1.5 percent, compared with a 2 percent threshold earlier.

The new agreement between the Bank and the finance ministry means the central bank can build up to 5.5 billion pounds of capital from profits from its operations before needing to hand over all further profits to the finance ministry.

If losses cause capital to fall below 500 million pounds, the Bank can ask the finance ministry for a handout.

Unlike some other central banks, the BoE does not automatically keep profits from issuing bank notes or other operations.

Reporting by Andy Bruce and David Milliken; Editing by Leslie Adler

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