1.65 The MPC has decided to undertake further asset purchases financed by the issuance of central bank reserves through the Asset Purchase Facility (APF), known as quantitative easing. This was based on the MPC's judgement in October that, in large part due to tensions in the world economy that threaten the UK recovery, inflation was otherwise more likely to be below the 2 per cent inflation target in the medium term than above. The Chancellor has authorised an increase in the ceiling on these asset purchases by £75 billion to £275 billion.20 Recent Bank of England analysis provides evidence of the effectiveness of asset purchases in supporting demand.21 The MPC's most recent assessment in the November 2011 Inflation Report is that, conditioned on Bank Rate moving in line with market interest rates and £275 billion of asset purchases, inflation is more likely to be below the target than above it in the medium term, but that there are substantial uncertainties. The MPC continues to stress that it stands ready to respond accordingly to changes in the balance of risks to the inflation outlook.
1.66 The APF can also purchase eligible private sector assets financed by central bank reserves, Treasury bills and the DMO's cash management operations. It has been shown over the life of the APF that its objective to ensure the normal functioning of corporate capital markets can be delivered by undertaking asset purchases of substantially less than the ceiling of £50 billion set in 2009. The ceiling on private sector asset purchases is therefore being reduced by £40 billion to £10 billion. This provides scope for the Government to announce a package of credit easing interventions.
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20 The Chancellor's letter to the Governor of the Bank of England is available on the HM Treasury website at www.hm-treasury.gov.uk.
21 Quarterly Bulletin 2011 Q3, Volume 51 No. 3, Bank of England, September 2011.