Explanatory Notes - Wholesale
BANK RATE
MINIMUM LENDING RATE
BAND 1 DEALING RATES
REPO RATE
THE OFFICIAL BANK RATE PAID ON COMMERCIAL BANK RESERVES
BASE RATES OF SELECTED RETAIL BANKS
INTERBANK STERLING MARKET
GILT REPO MARKET
OVERSEAS CURRENCY DEPOSITS
EURO-CURRENCY
EURO INTERBANK LENDING (LIBOR)
3 MONTH EURIBOR
EURODOLLAR DEPOSITS IN LONDON
EURO-STERLING DEPOSITS
STERLING CERTIFICATES OF DEPOSIT
ELIGIBLE BANK BILLS
TREASURY BILL TENDER 3 MONTH (91 DAYS) BILLS
US TREASURY BILLS (91 DAYS)
EURO/ECU BILLS
EURO COMMERCIAL PAPER
Official Bank of England rate
Prior to September 1971, the main policy objectives of the authorities
had been control over the supply of credit available to the private sector
and control over the level and structure of interest rates. The former
objective was attained by the imposition of quantitative and qualitative
restrictions on bank lending and setting the conditions for hire purchase
credit. The latter was achieved by an interest rate set by the Bank of
England - Bank Rate.
A net flow of funds from the Bank and Government to the Banking Sector created
a surplus of funds in the money market. Conversely, a net flow of funds in
the opposite direction created a shortage. Since Government receipts do not
match Government expenditure, the Bank intervened in the markets through the
Discount Houses, by issuing and buying Treasury Bills to ensure that the banking
system was in balance at the end of the day.
Bank Rate had a direct influence on interest rates in the domestic banking
system, being the rate at which the Bank of England, acting as lender of last
resort, would normally lend to members of the discount market against security
(e.g. Treasury Bills and eligible bills). It was also a conventional reference
point for the rates which the London Clearing Banks paid on deposits and charged
on advances.
Bank Rate had less influence on the rates of non-resident and other banks operating
in the UK, which then, as now, were linked to market rates, especially those
in the interbank market.
The monetary reforms which became effective in September 1971 were designed
to introduce more competition amongst the clearing banks and choose the
rate of growth of the money stock as a main policy objective. A logical
continuation of these measures was the replacement of Bank Rate on 13
October 1972 by Minimum Lending Rate (MLR).
MLR represented the minimum rate at which the Bank, acting as lender of last
resort, normally lent to members of the discount market against specific security.
Until 24 May 1978, the rate was normally set 1/2% higher than the average rate
of discount for Treasury bills established at the weekly tender, rounded to
the nearest 1/4% above and effective, for lending by the Bank, from the following
working day. However, special changes in the rate were not precluded under
this system; in this event the announcement was normally made at midday on
Thursdays. A new rate determined in this way was effective immediately and
the operation of the normal formula suspended until market rates had moved
into line. On 11 March 1977, these arrangements were modified in one respect:
in cases where the operation of the formula would have brought about a reduction
in the rate, the Bank reserved the right, exceptionally, either to leave the
rate unchanged, or to change it by less than would have resulted from the operation
of the formula.
While MLR was the means of implementing interest rate policy from day to day,
the principal instruments that reinforced MLR in accomplishing monetary control
over a longer period were the special deposit scheme (this had existed since
1960 with modifications), the reserve assets ratio (which applied from 1971
to 1981) and, on occasions between 1973 and 1980, the supplementary deposits
scheme.
Each had direct implications for the money markets: a call for special or supplementary
special deposits withdrew cash from the banking system while the reserve ratio
arrangements ensured that some of the short-term assets were not available
to meet cash shortages.
On 25 May 1978, it was announced that the rate would in future be determined
by administrative decision and any change would normally be announced at 12.30
pm on a Thursday; the new rate would become effective, for lending by the Bank,
immediately.
Two main short-comings became apparent in these arrangements. First, developments
such as higher and more variable rates of inflation worldwide and the increased
attention given to the monetary growth were associated with higher and more
volatile interest rates. Second, there were insufficient holdings of Treasury
bills to sell to the Bank to fund the market ’s shortages or to buy in
surplus.
Following discussion papers and consultation with relevant parties, the
Bank’s operating techniques in the money market were changed in
stages, beginning in October 1980. The formal arrangements were set out
in the Bank’s paper "Monetary Control Provisions"; these
began to take effect on 20 August 1981 when MLR was suspended. The Bank
was able, however, at its discretion, to announce in advance the minimum
rate which it would apply in any lending to the market. MLR has been invoked
on numerous subsequent occasions for one day only. The reserve ratio requirements
were discontinued and the cash ratio scheme introduced. The special deposit
scheme remained available.
The Bank’s initial aim was to keep very short-term interest rates within
an unpublished band, set by the authorities, to establish a specific level
of interest rates. Any lending would normally be at a rate above comparable
market rates, but within the band. There were 4 dealing bands ranging from
Band 1 to Band 4 with maturities of 1-14 days, 15-33 days, 34-63 days and 64-91
days. Most typically the Bank dealt in Band 1. Operating in such maturity ranges
was necessary for outright purchases because if the Bank had specified a single
maturity date, the market may have had difficulty mobilising sufficient paper
maturing on that specific date at short notice.
The Bank’s intervention in the money markets placed greater emphasis
on open-market operations (as opposed to direct lending) in the bill markets,
principally through members of the London Discount Market Association (LDMA).
The Bank operated with the broad intention of offsetting daily cash flows,
in either direction, between the Bank and the money market.
There was an extension of the list of eligible banks that were required to
hold a minimum proportion of their eligible liabilities in secured deposits
with members of the LDMA. This ensured that during periods of extreme money
market shortages, the Discount Houses could effectively perform their role
as intermediaries.
In supplying liquidity to the market, the Bank operated primarily through the
discount houses, buying Treasury bills and eligible local government and bank
bills either outright or on ‘repo’ (sale and repurchase agreements)
to meet anticipated surpluses/shortages. The Bank aimed to supply on a daily
basis whatever liquidity was necessary. Depending on the size of the day’s
shortage, the Bank operated up to three times a day, offering to buy bills.
If this was insufficient to deal with the shortage, the Bank lent on a secured
basis to the discount houses at the end of the day (up to an amount linked
to their capital).
With the end of pre-determined dealing rates, the discount houses competed
to sell paper to the Bank, including repo, (or buy from it when in surplus),
through their choice of rates at which they could afford to do business. The
Bank influenced interest rates by its reactions to these offers. If the Bank
was content with these offers, it would accept sufficient amounts to ensure
the market was in balance. However, if these offers conflicted with the Bank’s
higher interest rate objective, all or part of the offers were rejected. The
Bank then declined to deal in the bill markets or limited its dealings so forcing
those houses that were short of cash to borrow. The Bank then set a lending
rate consistent with the level it was seeking to establish.
After 1991, there was at times a sizeable increase in the amount of liquidity
the Bank has had to supply day-by-day to relieve the banking system’s
shortage. This largely arose from movements in Government financing and because
the discount houses had generally shrunk in size. To overcome this problem,
the Bank introduced a twice-monthly repo operation in 1994 which built on the
temporary arrangements introduced in September 1992 when sterling left the
ERM. This repo facility was offered to a wide range of counterparties (including
banks, discount houses, building societies and gilt-edged market-makers) and
used different assets. These were primarily gilt repo, in which the Bank buys
gilts from its counterparties and agrees to sell them back at a future date
at a price set in advance. The liquidity provided through the repo facility
reduced the liquidity the Bank needed to support its daily operations to a
more easily manageable amount.
During 1996, further changes to the Bank’s open money-market operations
were announced. Following discussions with market participants, the Bank
issued a notice "Reform of the Bank of England’s operations
in the sterling money markets", which gave operational details of
the arrangements which were introduced on 3 March 1997.
The Gilt Repo market began in January 1996 and by February 1997 had developed
sufficient scale and depth to be included in the Bank’s open market operations.
The Bank continued to use Treasury bills and eligible bank and local government
bills, both for repo alongside gilts, and for outright sale to the Bank. Also
included were HM Government foreign currency marketable debt (including euro
notes and bills issued by HM Government and the Bank of England), eligible
sterling denominated securities issued by EEA governments and major international
institutions and eligible euro denominated securities including strips, issued
by EEA governments and major international institutions.
In repo operations, funds can be provided against any acceptable security with
a maturity longer than that of the repo. In the years before 1997 the Bank
had been providing funds to the market with an average maturity of two weeks.
The Bank retained approximately this maturity for its repo dealing operations.
The Bank conducted its open market operations at 9.45 am (or 12noon on those
days when the MPC announced its decision) and 2.30 pm. The Bank also provided
overnight repo facilities at 3.30pm for its money market counterparties and
at 4.20pm for the settlement banks, to accommodate these imbalances.
The Bank ceased to deal exclusively with members of the London Discount Market
Association (LDMA) in its daily operations, dealing instead with a wide range
of financial institutions active in the gilt repo and/or bill markets who meet
the necessary functional requirements for its operations. The twice-monthly
repo facility was suspended in March 1997.
The official Bank rate paid on commercial bank reserves
On 18 May 2006 the Bank introduced some wide ranging reforms to the framework
for its operations in the sterling money markets (details can be found at: http://www.bankofengland.co.uk/markets/moneymarketreform and http://www.bankofengland.co.uk/markets/money/publications/redbook0506.pdf).
Theses reforms included:
A new timetable for open market operations (OMOs), which are used to supply the right amount of money to allow banks in aggregate to hold their target reserves. In these OMOs the Bank lends by way of repo. Once a week it makes one-week loans. On the last day of each maintenance period it also undertakes a “fine-tuning” overnight operation, lending or borrowing as necessary. Weekly and fine-tuning repos are undertaken at the official Bank rate. In addition the Bank undertakes longer-term repos at maturities of 3-12 months. These longer-term repos are undertaken not at the official Bank rate but at market rates determined in variable rate tenders.The introduction of reserve accounts, held by commercial banks at the Bank, on which the official Bank rate is paid. The reserves scheme is voluntary and members undertake to hold a particular target balance not every day but on average over a monthly “maintenance period”.
Standing facilities which allow a wide range of banks to borrow (against collateral) or deposit money with the Bank at rates which on most days are 1% above and 1% below the official Bank rate, but 25 basis points (¼%) above or below on the last day of each maintenance period.
Changes in Bank Rate, Minimum Lending Rate, Band 1 Dealing Rate, Repo Rate and the official Bank rate normally signify a marked change in the level of short-term market rates. As such, they are used as an indicator of the broad level of market rates.
Base rates of selected retail banks
The base rates of Barclays, Lloyds TSB, HSBC and National Westminster banks only are used to compile this series. Each of these has a single base rate, which may differ from those of other banks in the sample - a spread is shown when this occurs.
Prior to 16 September 1971, the London Clearing Banks maintained interest rate agreements in that they charged the same minimum rates on advances to industrial and commercial companies and paid the same rates on deposits. Both rates were linked to Bank Rate with the rate on advances at a fixed margin above Bank Rate and the deposit rates (normally 7 days) at a fixed 2% below.
With the introduction of Minimum Lending Rate (MLR) on 13 October 1972 and the ending of this agreement, the London Clearing Banks generally linked their base rates to MLR. However, with the introduction of Band 1 dealing rates on 20 August 1981, their individually declared base rates moved more flexibly in response to market developments because the Bank of England’s "stop" rate in its open market operations was no longer published. A consequence of this was a more flexible market-related pricing of overdraft facilities. However, the final lifting of the clearing banks lending ceilings saw a surge in the use of the interbank market to finance lending at rates closely related to money-market rates, which vary daily.
The unsecured interbank deposit market began to develop in the 1960s as the wholesale market in which banks and others lend and borrow money for predetermined periods ranging from overnight to one year, to accommodate short-term liquidity needs or for the lending on of surplus funds. This market was given further impetus by the deregulatory reforms of the early 1970s, the abolition of exchange control at the end of the 1970s and the final lifting of the retail banks lending ceilings. The 1980s saw a surge in intermediation as the newly liberalised banking system greatly extended the range of financing facilities provided to its industrial and commercial customers.
Since 1985, the rates shown are representative rates and are the mean of the bid and offer rates obtained from a minimum of three brokers at 8.30 am; for earlier periods the figures are described as the mean of the lowest bid and highest offer rates over the day.
The figures shown for the one month rate for 1970-1977 inclusive are for the last Friday of each period. The figures shown for the three months rate for 1970 and 1971 are for the last Friday of the month; from 1972 - 1977 inclusive, the figures are the average of Fridays in each period.
These are quoted (nominal) rates and are the mean of the bid and offer rates from three or more brokers at 8.30am. SONIA is the weighted average rate to four decimal places of all unsecured sterling overnight cash transactions brokered in London between 0001 hrs and 4.15pm London time. From 2 June 2003, all sterling overnight deals irrespective of coutnerparty status, with a minimum size of £25 million transacted by WBMA members will be included in the SONIA calculation. Previous to this, counterparties to SONIA transactions were on Section 43 of the Financial Services Authorities list of Listed Money Market Institutions, and their overseas branches, as of 2 November 2001.
Gilt repo transactions are sale and repurchase agreements in British government stock, conducted in accordance with legal documentation. A repo transaction may be stock or money-driven; a stock may be reverse-repoed (bought with an agreement to re-sell it) to cover a short position, e.g. cash may be borrowed against a repo of a mixture of gilts as "collateral" for the loan. The latter, a general collateral (GC) transaction, is a money-driven trade, and so GC repo is a market in secured money. The rates quoted in the table are indicative secondary market mid-rates of bid and offer GC rates collected at 8.30am.
Overseas currency deposits
A deposit in an institution of the same home as the currency but held outside the country of origin. The 3 month Euro-dollar and Ecu/Euro are market rates for deposits in the London euro-currency market.
Euro interbank lending (LIBOR)
BBA LIBOR offered rates are available for each of thirteen major currencies from sixteen reference banks in London selected by the British Bankers Association (BBA) on the basis of private nominations and discussions with advisory panels of senior market practitioners. These banks are selected to reflect the balance of the market in terms of country of origin and type of institution, on the basis of reputation, scale of market activity and perceived expertise in the currency. The BBA, having discarded the four highest and lowest rates, calculates BBA LIBOR by arriving at an arithmetically averaged rate (rounded up to the nearest 1/16%). The resulting interest rate is the rate broadcast as BBA LIBOR.
EURIBOR is the European Interbank Offered Rate for money market deposits. Since 4 January 1999, the European Banking Federation and the EMU division of ACI, the Financial Markets Association, have sponsored the calculation of Euribor (with reference to a panel of 57 banks). Euribor is the rate at which euro interbank term deposits are being offered within the EMU zone by one prime bank to another at 11:00am Brussels time. It is quoted for spot value and on an actual/360 day basis. Because of the wider spread of banks (some of a lower credit rating than BBA LIBOR banks) EURIBOR is typically higher than EURO LIBOR. EURIBOR is the market benchmark for Euro interest rates as opposed to BBA EURO LIBOR.
Pre 1999, the data included refer to the ECU Libor rate. The ECU Libor was the interest rate at which ECU deposits were offered between participants in the London market. This was calculated by Telerate on behalf of the BBA and is referred to as BBA 11am fixing. Interest was also compiled on the basis of 360 for maturity.
These are middle-market rates for US dollar deposits as recorded by the Bank of England during the late afternoon. Figures shown here up to and including 1979 3rd quarter are averages of Friday observations. Thereafter, they are based on daily observations.
Euro-currency is defined as a deposit placed in an institution of the same domicile as the currency but held outside the country of origin. Paris is the main centre of the Euro-Sterling market. The rate given is the middle-market rate as recorded by the Bank of England during the late afternoon.
Figures shown here up to and including 1979 3rd quarter are averages of Friday observations. Thereafter, they are based on daily observations.
Sterling certificates of deposit
A rigidity in the interbank market was that deposits once taken, could not be traded during their life (even though this was very short term). To meet this need, from the late 1960s certificates of deposit (CD) were introduced which could be traded on a secondary market.
A London sterling CD is issued with standard terms and conditions by institutions which were authorised under either the Banking Act 1987 (now replaced by the Financial Services and Markets Act 2000) or the Building Societies Act 1986, and European authorised institutions. It is issued and payable primarily in London and in minimum deposits of £100,000. By market convention it is a short-term marketable instrument with a maturity up to five years, although longer maturities can now be issued. Despite this, the vast majority of certificates are issued for periods of less than six months. Interest can be at a fixed or variable rate, although they may also be issued at a discount and without a coupon. Interest bearing certificates are normally issued at par for large amounts. The rate of interest is closely related to the current market rate on sterling interbank deposits of a corresponding maturity. They are readily negotiable in the secondary market. CDs are not eligible as security in the Bank’s open market operations.
Most of these sterling certificates are held by banks operating in the United Kingdom, building societies and other money market players. The remainder are held mainly by other financial institutions and by non-financial companies; holdings abroad are small and personal holdings negligible.
The rates shown are representative secondary money-market rates for clearing bank CDs. Since 1985, the mean of the bid and offer rates at about 8.30 am are published; data for earlier years are for the mean of the range of rates over the day.
The figures shown for 1970 and 1971 are for the last Friday of each period; from 1972 to 1977, figures are the average of Fridays in each period. Thereafter, they are based on daily observations.
A bank bill is a bill of exchange accepted by a bank. It represents an order in writing, addressed by one person to another and signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed date, a specified sum of money. The bill is made out by the signatory always with the consent of the person to whom it is addressed, who signs or accepts it, and mainly in relation to the sale of goods or produce. Eligible (bank) bills comprise those commercial bills which are accepted by a bank, on a list maintained by the Bank of England and which meet a number of criteria, relating to the purpose for which the bill is drawn, the clausing and maturity of the bill and the eligibility of the accepting bank.
Prior to 1984, the series refers to prime bank bills. Since 1985, the rates shown are described as the mean of the bid and offer rates in the secondary market at about 8.30 am, derived from three sources. From 1975 to 1985 the rates shown are the mean of the bid and offer of close of business rates. For earlier years, the data are the mean of the range of buying rates over the day; before 6 August 1971 it is the minimum buying rate agreed by members of the discount market. The figures shown for 1970 to 1974 inclusive are the average of Fridays in each period. Thereafter, they are based on daily observations.
On 11 February 2005 the Bank issued a press release stating that it was to cease accepting eligible bankers' acceptances as collateral in its sterling money market operations (see press notice at www.bankofengland.co.uk/publications/news/2005/014.htm). From 14 March 2005 bills will no longer be eligible for rediscount, however those that were issued before this date will remain eligible as collateral until 17 August 2005.
Treasury bill tender 3 month (91 days) bills
Treasury Bills are bearer Government Securities representing a charge on the Consolidated Fund of the UK issued in minimum denominations of £5,000 at a discount to their face value for any period not exceeding one year. Although they are usually issued for 3 month (91 days), on occasion they have been issued for 28 days, 63 days and 182 days. They are issued:
- by allotment to the highest bidder at a weekly (Friday) tender to a range of counterparties;
- in response to an invitation from the Debt Management Office to a range of counterparties;
- at any time to Government departments (non-marketable bills only).
The secondary market in Treasury bills has in recent years become illiquid and representative rates are no longer obtainable other than those for the most recently issued 91 day bills. The rates shown are the average rates of discount at the weekly tender for 91 day bills.
This is the market selling rate in New York for 91-day Treasury bills, expressed as a yield (per cent per annum of 360 days). Figures shown here up to and including 1979 3rd quarter are averages of Friday observations. Thereafter, they are based on daily observations.
Since July 1999 euro bills have been issued by the Bank of England. Prior to this, euro Treasury bills were Government securities representing a charge on the Consolidated Fund of the UK, denominated in euro (before 1999 in Ecu). The procedures for issuance and interest rate calculations for Bank of England euro bills and euro Treasury bills are the same (as follows):
Bills are issued at a discount to their face value for periods of 1, 3 or 6 months. Issues are sold by allotment to the highest bidder at monthly auctions on the second Tuesday of each month. Bids are made on a yield basis.
The rate shown is the average secondary market mid rate for 3-month bills, expressed using the standard euro money market yield convention (per cent per annum, using actual days to maturity and a year of 360 days).
Euro bills only have a single maturity date in any given month, namely the Thursday after the second Tuesday of the month. The end-quarter rate reflects the rate on the bill with just under 3 months remaining to maturity. The monthly average is for the bill maturing in the month three months later.
6 banks are contacted on a daily basis for the median rate for that day, for the relevant type of euro-commercial paper. The rate published is the average of these 6 observations.
The Bank of England collect primary market A1-P1 indicative bid rates (the rate at which investors bid to buy the paper of issuers rates A1-P1), and it does not include commission.
We do not distinguish between the different types of issuers, only by ratings.
The rates have maturities of 1m, 2m, 3m and 6m.
