News Release
New Framework will Modernise Sterling Money Markets
26 April 2006
The Bank is today confirming that it will launch its new framework
for official operations to implement interest rate decisions
in the sterling money markets on 18 May.
The new framework will represent a fundamental change in the
way interest rate decisions made by the Monetary Policy Committee
are channelled into the financial system, and in the framework
within which banking system liquidity is managed.
The reforms will modernise the nature of the market operations
undertaken between the Bank of England and the banking system.
For the first time in its history, the Bank will pay interest
on balances held by the banks and building societies participating
in the arrangements; banks will hold target balances with the
Bank on average over a month rather than having to ‘square
up’ every day; deposit and collateralised lending facilities
will be widely available; and the Bank will move from daily
to weekly open market operations.
The changes are designed primarily to limit volatility in very
short-term market interest rates and to enhance UK banking system
liquidity management in the sterling money markets. By reducing
volatility, offering more facilities and bringing many more
banks into the system, the new framework will create a more
efficient and flexible framework for UK banks to manage their
day-to-day liquidity – a central part of the financial
system.
Commenting on the forthcoming launch of the new framework, Paul
Tucker – Executive Director for Markets at the Bank of
England – said:
“These reforms to our operations are a major step forward
for the sterling money markets. We hope they will put the Bank
at the forefront internationally in the implementation of monetary
policy decisions and managing liquidity within the financial
system.”
Notes to Editors
1 The overall reformed framework for the Bank’s operations
in the sterling money markets was set out in a paper ‘Reform
of the Bank of England’s Operations in the Sterling Money
Markets’ published on 4 April 2005 (see link below).
The objectives of the reforms are:
• Overnight market interest rates to be in line with the
MPC’s repo rate, so that there is a flat money market
yield curve, consistent with the official policy rate, out to
the next MPC decision date, with very limited day-to-day or
intra-day volatility in market interest rates at maturities
out to that horizon.
• An efficient, safe and flexible framework for banking
system liquidity management – both in competitive money
markets and, where appropriate, using central bank money –
in routine and stressed or otherwise extraordinary conditions.
• A simple, straightforward and transparent operational
framework.
• Competitive and fair sterling money markets.
In pursuit of these objectives, the Bank is introducing a new
framework based on a system of voluntary remunerated reserves
with a period-average maintenance requirement. In addition,
standing borrowing and deposit facilities will be available
on demand to a wide range of banks and building societies. The
Bank’s short term open market operations will move to
weekly operations of one-week maturity, with a routine overnight
fine-tuning operation on the final day of the maintenance period.
2 In March, the Bank announced that it expected to introduce the new framework on 18 May, subject to the successful completion of a dress rehearsal involving external participants; it also set out the key operational milestones leading up to launch (see link below).
3 Ahead of the launch of the reformed framework, the Bank will finally confirm the launch date and issue a new version of the 'Red Book', the publication in which the Bank's operational framework is described. The Bank's current operational framework is described in the May 2002 paper 'The Bank of England's Operations in the Sterling Money Markets' (see link below).
Key Resources
 |
Reform of the Bank of England's Operations
in the Sterling Money Markets, 4 April 2005 |
|
Market Notice to Participants, 29 March 2006 Download PDF (37k) |
|
Bank of England's Operations in Sterling
Money Markets, May 2002 |
