The Bank of England has outlined a proposal for a radical reform to help smooth the swings in the interest rates between the regulators’ meetings. So far, the British short-term market has been known for extreme volatility, as one bank could influence the overnight rate, using the money it borrowed from the Bank of England and trading it at a rate that is different from the Bank’s official rate. Paul Tucker, Bank of England executive director for markets, admitted that the UK had "a peculiar core money market".

 

The Bank has announced a consultation deadline of January 7 on the fine print that was released last week.

 

The crux of the reform is the introduction of the interest that banks will be earning on their reserves they hold at the Bank of England, for the first time in 300 years of the Bank’s history. The reserve target level will be set as a monthly average.

 

The Bank expects 12 settlement banks, holding only minimum accounts at the moment, to add significantly to these amounts, up to 100 times.

 

The British Bankers' Association commented positively on the proposal saying it is "broadly happy with what the Bank is proposing".