Learning to navigate bumps in the road

By Simon Dolan and Matt Roberts-Sklar^{footnote [1]}

The rising and broadening usage of our market-wide facilities is welcome, supporting our core objectives of monetary and financial stability.

Since early 2022, the Bank has been steadily reducing its balance sheet, principally due to the unwind of quantitative easing (QE) purchases and the run-off of the Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME). Sterling reserves have dropped from a peak of nearly £1 trillion at the end of 2021 to £660 billion as of November 2025 (Chart 1).

This reduction is not unique to the UK; central banks globally are seeking to normalise their balance sheets following crisis-era expansions. Going forward, the Bank’s approach to reserves supply will be demand driven. We do not target a fixed reserve level. Instead, we let our framework respond flexibly to the needs of counterparties, providing liquidity when required through repo operations, given the terms of our facilities.

This increased usage of our facilities is welcome: they are functioning as intended and have effectively provided reserves, smoothing the impact of the reduction of the Bank’s balance sheet.

Chart 1: Reserves and their backing assets (since end-2021 peak)

Footnotes

• Sources: Bank of England and Bank calculations.

As we have noted previously,^{footnote [2]} the transition towards a repo-led, demand-driven framework is progressing well. Participation in the Bank's market-wide facilities – the ILTR and the STR – has increased considerably over the past six months, both in volume and in breadth of participation (Chart 2). Combined drawings under the ILTR and STR now exceed £150 billion with more than 90 individual firms having outstanding drawings today. The weekly STR usage consistently in the £80 billion–£100 billion range, and the outstanding ILTR stock is over £60 billion.

Chart 2: Outstanding ILTR, STR drawings (£ billions) and number of counterparties borrowing

Footnotes

• Sources: Bank of England and Bank calculations.

Short-term money market rates have remained closely anchored to Bank Rate, indicating the framework is working as intended at this stage in transition (Chart 3). Repo rates have edged up over time. As discussed in a Bank Overground post and a recent speech by Vicky Saporta, this is expected as higher gilt repo rates are an outcome of significant increases in the stock of gilts held by the market and lower levels of reserves than the market has been accustomed to.^{footnote [3]} However, repo rates are consistently around +3–8 basis points above Bank Rate on average,^{footnote [4]} indicating that they remain anchored to the policy rate on a persistent basis.

As the market adjusts to this new environment, a pickup in volatility compared to the past decade is a natural effect of the transition. We also see (as expected) increased repo rate volatility specifically around month-ends as dealer balance sheet capacity is pared back over key reporting dates. This is not a new phenomenon; spread deviations from the policy rate, most notable at year end, existed during periods of abundant reserves, albeit in the opposite direction.

Volumes and participation in the unsecured SONIA^{footnote [5]} risk-free rate benchmark continue to be robust. As noted in a Bank Overground post , with falling reserves and increasing rates in repo markets, depositors in overnight unsecured markets have been able to demand a higher rate of return on their deposits and so rates in unsecured markets have edged up, as we would expect. The SONIA to Bank Rate wedge has recently narrowed to just under 3 basis points^{footnote [6]} (Chart 3). Overnight unsecured spreads may compress further as market participants adjust to new levels of reserves.

Chart 3: Money market interest rates since 2020

Footnotes

• Sources: Bank of England, Sterling Money Market Data Collection and Bank calculations.

In June, following our discussion paper on our balance sheet transition, we announced some changes to the pricing of the ILTR. Since then, ILTR usage has grown significantly, from around £20 billion in early June to over £60 billion at the end of November 2025. An increasingly wide range of firms are also using the ILTR – there are currently around 70 SMF firms with outstanding ILTR borrowings (equating to more than half of all SMF firms with access to the ILTR, and up from the 60 firms cited in our June post)^{footnote [7]} and we would welcome further broadening of participants.

These developments align with the ILTR’s intended longer-term role in supplying the majority of the total stock of reserves necessary for monetary control and financial stability. The Prudential Regulation Authority (PRA) judges usage of the ILTR to be routine sterling liquidity management.^{footnote [8]} So far, firms’ borrowing in our market-wide facilities has mainly been against high-quality collateral (Level A, largely gilts). However, since June, the share of ILTR usage against Level C collateral – less liquid collateral such as securitisations and portfolios of loans – relative to total STR and ILTR usage has begun to grow (Chart 4). This is another welcome development, broadening eligible collateral and improving access to liquidity across the system. We expect this trend to continue as incentives for a broader range of firms to draw against Level C collateral increase. This is because, as reserves continues to drain, the liquidity upgrade and LCR uplift provided by accessing the ILTR against level C will become increasingly valuable to firms.

Chart 4: Outstanding ILTR drawings by collateral set

Footnotes

• Sources: Bank of England and Bank calculations.

The STR continues to offer weekly access to reserves against the highest-quality collateral (Level A) at Bank Rate. Because allocation is unlimited in the STR, in aggregate it is our marginal facility for reserves supply and continues to play a key role in keeping money market rates close to Bank Rate. Weekly STR auctions routinely attract a diverse set of counterparties, including building societies, UK banks, and international banks operating in the UK (who play a key role in core sterling markets). Participation has broadened, averaging over 30 STR participants each week.

Crucially, this higher usage has not come at the expense of private repo and money market functioning, and activity in core markets (including funding markets) remains strong. This underscores that the Bank’s operations are seen as complementary to market-based financing transactions and not crowding out private sector activity. It is important that the central bank’s footprint remains appropriate to the market trading volumes (Chart 5).^{footnote [9]}

Chart 5: Sterling gilt repo stock outstanding and STR usage

Footnotes

• Sources: Bank of England, Sterling Money Market Data Collection and Bank calculations.

Market participants are adapting well to a new regime – but we are all still learning.

The transition to a repo-led, demand-driven framework represents a fundamental shift for our SMF participants. We are pleased to see firms learning as we transition with participants acclimatising to new patterns in liquidity demand and supply. This is evident in the longer-term trends discussed above – but also over shorter timeframes.

In October 2025, for example, various factors combined to push overnight repo rates to average over 30 basis points above Bank Rate, the highest intra-month daily average level this year. This volatility was anticipated, with a large reserves drain arising from TFSME repayments (£23 billion) coinciding with firms preparing early for October month-end (which was also Canadian bank year-end – Canadian banks are key intermediaries in core markets here and overseas), and in the context of a £40 billion gilt maturity and spillovers from tight US repo markets. These were expected. We see such episodes as a regular feature of the short-term money markets at period-ends, as do market participants.^{footnote [10]}

Chart 6 shows how overnight repo rates moved over this period. You can see the increase in repo rates in late October. In response to this increase, firms increased their borrowing by £14 billion in the weekly STR on 30 October. Alongside a £7 billion increase in the ILTR that week, these facilities injected reserves to smooth the TFSME-induced reserves drain.

Chart 6: Overnight cleared Delivery-by-Value (DBV) repo rates

Footnotes

• Sources: Bank of England, Sterling Money Market Data Collection and Bank calculations.

We are encouraged that firms responded to higher repo rates by borrowing more in the STR, in particular. We are also reassured that the increase in borrowing then pushed down on repo rates, demonstrating that the STR is doing its job of keeping money market rates close to Bank Rate. This is how we envisage the facility to be used.

While the STR played a stabilising role as firms borrowed more on this occasion, returning repo rates closer to Bank Rate, we saw the opposite effect a week later. STR drawings reduced by approximately £12 billion week-on-week leading to sharp upward movement in rates intraday on 6 November (Chart 7). There are various explanations for this, including that the repo market (more broadly) considered this reduction in aggregate liquidity – a result of reductions at the individual SMF counterparty level – was too severe. This set the tone for repo rates until the following week’s STR (green highlight in Chart 6). This example (as well as that of 30 October which surprised in the opposite direction – blue highlight in Chart 6), says something about the impact on price discovery in the repo market, given perceived ‘undershoots’ (or overshoots) in weekly STR drawings. It shows we are all still learning.^{footnote [11]}

Chart 7: Overnight Cleared DBV on 6 November 2025

Footnotes

• Source: BrokerTec Europe Limited.

It is expected that firms are still learning how best to forecast their own liquidity needs in the context of the overall system’s liquidity needs at this stage of the transition. Differences in firms’ approaches, governance, and the market’s collective adjustment to the Bank’s framework, mean that some unpredictability is inevitable. It remains early days in the transition to a demand-driven framework, and we expect that, with time, money markets become more adept at recycling a lower quantity of aggregate reserves as the incentives to engage in such activity increase. This should contain the impact of these transitional bumps.

Our on-demand, bilateral facilities have an important role to play (both in transition and steady state).

Given these movements in repo rates, a natural question is whether our repo facilities are, in fact, meeting the current aggregate level of reserves demanded by the system (and below which firms would not want to persistently operate). Empirical evidence suggests this is not the case: overall reserves levels continue to trend lower despite an upward trend in borrowing from our market-wide facilities. This evidence is also supported by the latest survey of our counterparties’ aggregate demand for transactional and precautionary balances (the Preferred Minimum Reserve Requirement, or PMRR) which is between £375 billion–£540 billion – at least £110 billion below the current £660 billion outstanding stock of reserves (Chart 8).

Chart 8: Estimates for the forward path of Bank of England reserves

Footnotes

• Sources: Bank of England and Bank calculations.

As Vicky Saporta outlined in her recent speech, we are naturally interested in when we are at the PMRR. However, our demand-driven repo-led framework is designed such that we do not need to know this: sterling liquidity, in the form of central bank reserves, is readily available as needed by SMF firms though our market-wide facilities. Put another way, our framework responds flexibly to the needs of counterparties, providing liquidity when required. And as discussed above, participants are drawing on that liquidity.

Of course, although liquidity at Bank Rate is available in unlimited size from the STR, the opportunities to do so are limited by the auction window being open for 30 minutes once a week only.^{footnote [12]} That is a deliberate choice: we do not want to disintermediate private markets. But we do recognise that there can be unexpected liquidity needs intraweek and intraday. This is why the Bank’s bilateral facilities, the Operational Standing Facility (OSF) and Discount Window Facility (DWF), have important roles in the repo-led framework, alongside our regular market-wide operations by offering liquidity on-demand, at any point during market hours.

The OSFs are on-demand, bilateral facilities which support firms in managing liquidity demand shocks, such as payment frictions, by allowing them to borrow reserves against Level A collateral, or deposit reserves, overnight, at a fixed spread to Bank Rate. The OSFs also limit volatility in market interest rates by providing an alternative source of borrowing to our regular market-wide operations, thereby supporting short-term rate stability.^{footnote [13]}

These facilities have always been available to SMF participants. And as with all SMF facilities, the OSFs are ‘open for business’ and should be used by SMF participants for the purposes of liquidity management.

Recalibration of the OSFs is a natural next step in strengthening the provision of reserves through our on-demand facilities.

Up until now, the spread to Bank Rate for the OSFs lending facility was +25 basis points, and -25 basis points for the deposit facility. This is largely a legacy of the reserves averaging era, reflecting the target corridor for overnight market rates in a ‘scarce’ reserves environment. This was relaxed for most SMF firms^{footnote [14]} following the introduction of QE and other lending schemes post-global financial crisis. During the subsequent ‘abundant’ reserves period, demand by SMF banks for OSF lending was, unsurprisingly, negligible.

As the Bank’s balance sheet unwinds, the role of the OSF is evolving with a greater emphasis on helping limit volatility in market interest rates by providing an alternative source of borrowing to our regular market-wide operations, thereby supporting short-term rate stability.

We have recently indicated that we are reviewing our on-demand bilateral facilities as part of our on-going balance sheet transition.^{footnote [15]} As of today, we have recalibrated the price of the OSFs to Bank Rate +/- 15 basis points.^{footnote [16]} This is consistent with our objectives, ensuring short-term market interest rates remain anchored to Bank Rate while limiting the risk of private market disintermediation.

Repo rates have increased as we have drained reserves, and more gilt collateral has been supplied to the market (as noted above). And with market rates naturally more sensitive to specific flows (including greater pressures over specific reporting dates), it is not surprising to see more instances of rates at high spreads to Bank Rate. If we look back over 2025, the frequency of market rates averaging above recalibrated OSF +15 basis points level each day remains a relatively infrequent occurrence (Chart 9), especially once month-ends are excluded.

Of course, as reserves continue to decline, we might reasonably expect to see more frequent – but brief – episodes of repo volatility, thus nudging the curve in Chart 9 to the right. The tighter OSF spread should encourage more dynamic use by SMF firms. It also supports firms to respond better to liquidity management needs that arise between our regular market-wide operations. We strongly recommend firms review their operational readiness and ensure they can draw on the OSF promptly when required. The team here at the Bank are ready to help.

Chart 9: Distribution of daily overnight gilt repo rates ^{(a) (b)}

Footnotes

• Sources: Bank of England, Sterling Money Market Data Collection and Bank calculations.
• (a) The dashed lines highlight the old OSF deposit and lending spreads, while the dotted lines highlight the new deposit and lending spreads.
• (b) The without month-ends segment removes a three-day window around each month-end.

The next stage in the development of the repo-led framework.

The Bank is also reviewing the DWF as the second step in strengthening the provision of reserves through on-demand, bilateral facilities and intends to provide an announcement on a recalibrated DWF in the first part of 2026.

In addition, as part of the PRA's review of the prudential liquidity framework in light of lessons from March 2023 and the Bank's transition to a repo-led framework, the PRA will update its proposed approach to usage of the full suite of market-wide and bilateral SMF facilities. The Bank’s facilities – including the OSFs and the DWF – as with the Bank’s market-wide facilities remain ‘open for business’ and should be used by SMF participants for the purposes of liquidity management.

Looking ahead to year-end.

As in other jurisdictions, we expect to see the usual year-end pressures on sterling repo rates, as we saw at the end of 2024. These largely result from balance sheet constraints faced by dealers and a heightened demand for liquidity within the market over year-end. In anticipation of these conditions, the Bank had already scheduled the final STR operation of 2025 on 23 December closer to year-end than previously offering participants a clearer forecast of reserves needed ahead of time. The recalibrated OSF will continue to be available during this period for liquidity management purposes. As always, we encourage market participants to plan for year-end and are encouraged from our conversations with the market that many have been.

We urge all SMF participants to take proactive steps in planning their year-end funding and to test their access arrangements to Bank facilities well in advance. This includes addressing internal governance and ensuring their teams – front office, risk, and settlements – understand how and when to use Bank facilities.

Conclusion.

The ongoing transition to a repo-led, demand-driven framework is progressing as planned, yet its success relies on continuous learning and engagement from both the Bank and the market. By working collaboratively and adapting to new challenges, we can ensure that sterling markets remain liquid and stable, thereby ensuring the Bank’s primary objectives of monetary and financial stability. Our goal is a resilient, demand-driven system where the Bank’s tools support but do not replace healthy market dynamics.

The continued availability of our on-demand facilities – the OSFs and DWF – means that, even as the Bank’s balance sheet contracts, firms are able to manage liquidity shocks. This, of course, is not a substitute for prudent planning and robust liquidity management practices.

We encourage all SMF members to ensure their systems and governance arrangements are up to date to access these facilities as needed, including having pre-positioned collateral and clear lines of internal delegation.

As we progress through our balance sheet transition, we will continue to learn and adapt and – as ever – we remain very much open for business.