Asset Purchase Programme

The Asset Purchase Programme (APP) is a Bank of England scheme through which the central bank buys government bonds (gilts) and corporate bonds in the open market to inject money into the economy and lower long-term interest rates. By absorbing large quantities of debt from financial institutions, the APP relieves collateral pressure, lowers term premiums, and signals the Bank’s willingness to support credit conditions during crises.

The structural logic behind the APP

The Bank of England’s Asset Purchase Programme sits at the intersection of two monetary-policy challenges. First, when interest rates fall to near zero, conventional policy loses traction—you cannot cut rates further without paying banks to hold reserves, which is politically awkward and economically odd. Second, during crises, financial institutions hoard bonds as collateral and avoid the private market, creating a scarcity that locks up credit. The APP addresses both: it keeps rates low by design and injects liquidity by absorbing bonds from the financial system.

The mechanism is straightforward but potent. The Bank announces a target purchase amount, then conducts auctions or bilateral deals with market participants to buy gilts and corporate bonds. When the Bank buys a gilt from a bank or fund manager, that seller receives cash—money that can be deployed to new lending, dividend payments, or purchases of other assets. The money supply expands. Simultaneously, the Bank removes duration and credit risk from the private market, lowering yields across the curve and narrowing credit spreads because fewer safe bonds are available to banks as collateral.

Why gilts came first

UK government bonds—gilts—were the natural starting point when the Bank launched APP in 2009. Gilts are the safest, most liquid sterling-denominated asset. By absorbing them at scale, the Bank could inject immense quantities of cash without taking outsized credit risk. Moreover, removing gilts from circulation raises their scarcity value and lowers gilt yields, which is exactly what an accommodative central bank wants when conventional policy has exhausted itself.

The gilt-buying programme ran in multiple tranches. Each announced purchase target—£75 billion, then £50 billion more, then £100 billion, and so on—came with forward guidance on the pace and types of gilts the Bank would buy. The Bank also specified that it would purchase across the maturity curve, from shorter-dated 2-year gilts to 30-year bonds, ensuring broad relief in yields and preventing any single part of the curve from becoming starved of supply.

Corporate bonds: taking the next step

After establishing gilt purchases as routine, the Bank extended APP to sterling-denominated corporate bonds issued by non-financial companies. This was a deliberate escalation. Corporate bonds carry credit risk; the Bank was no longer buying only government debt but also betting on company survival. Yet this step was essential to true credit easing: the non-financial private sector—manufacturers, retailers, utilities—depends on bond markets for funding. By buying corporate bonds, the Bank lowered corporate borrowing costs, signalled faith in the private sector, and encouraged investors to price credit risk more finely rather than reflexively widening spreads in panic.

The corporate-bond arm of APP operated more selectively than gilt purchases. The Bank set eligibility criteria: the issuer had to have an investment-grade credit rating (or equivalent), the bond had to be denominated in sterling, and the company had to be domiciled in the EU or UK. This constraint meant the Bank wasn’t buying junk debt or financing zombies, but it did broaden the transmission of policy into real corporate activity.

Size and impact: the numbers speak

By early 2022, the Bank of England’s APP holdings had swollen to roughly £890 billion—an enormous quantity relative to the size of UK financial markets. This represented an extraordinary shift in the composition of central-bank assets. Before 2008, the Bank held mostly short-term bills and Treasury funds; by 2020, it held nearly a trillion pounds in long-duration bonds bought from the private sector.

The impact on yields was material. Gilt yields fell as the Bank’s purchases progressed, not because economic fundamentals demanded it, but because the Bank was systematically removing supply from the market. Corporate bond spreads—the gap between corporate yields and gilt yields—also compressed, signalling investors’ retreat from panic-driven risk aversion. Credit flowed more readily to businesses, rates fell, and asset prices inflated (which boosted household wealth and encouraged spending).

When does APP unwind?

As inflation rose in 2021–2022 and the Bank shifted toward raising interest rates, the question of APP unwinding became urgent. The Bank couldn’t raise rates if it was still flooding the market with newly printed money through asset purchases. So the APP paused in December 2021, and by 2022 the Bank had begun discussing how to shrink its bond holdings. The process is slow—the Bank cannot dump £900 billion of bonds in months without destabilising markets—but the principle is clear: when policy tightens, APP must reverse.

This poses a practical puzzle. Many of the gilts and corporate bonds the Bank bought during 2009–2021 are now owned by the central bank itself, not by private investors. If the Bank sells them aggressively, it risks a sharp rise in yields and a squeeze on borrowers. If it sells passively (allowing bonds to mature without rolling them over), the unwinding takes decades. The Bank has chosen a measured approach: holding bonds to maturity, reinvesting some coupon payments, and selling only gradually.

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