By Seamus Mac Gorain of the Bank’s Foreign Exchange Division.
This article describes how the Bank’s new arrangements for implementing the Monetary Policy Committee’s interest rate decisions should tie market interest rates more closely to the Committee’s official rate. In the new framework, banks and building societies will be able to hold an average level of reserves at the Bank over a month-long ‘maintenance period’. The article shows that the Bank’s commitment to adjusting the supply of reserves on the final day of the maintenance period should ensure that the market rate is expected to be on target on that day. It also describes how the ability of scheme members to run their reserve balances up and down from day to day in response to changes in market rates should mean that the rate expected on the final day of the maintenance period prevails over the rest of the period.