* BoE looks at how to end crisis-era money market measures
* Officials say will keep existing framework in near-term
* BoE may return to "reserves averaging system" after review
By Andy Bruce
LONDON, Aug 20 Bank of England policymakers have
started to discuss how to end crisis-era measures which pegged
overnight money market rates to the central bank's official
interest rate, the BoE said on Wednesday.
The news of high-level discussions about reforms to the
central bank's money market operations - crucial to the way it
implements monetary policy - came in policy minutes which also
showed that two BoE officials broke ranks to vote for higher
interest rates this month.
The BoE said its existing framework, which was introduced in
2009, could continue to be used in the "near term" to implement
any increases in the Bank Rate, its official interest rate.
But it said it expected to give more information about
changes in the coming months. Changes would also be needed once
a decision had been reached about the future of the BoE's 375
billion pounds of government bond purchases, which it bought
between 2009 and 2012 with newly created money to spur the
Since 2009, the BoE has paid interest on all commercial
banks' reserves held at the central bank at the official base
rate, currently 0.5 percent, to keep money market interest rates
in line with the base rate.
Members of the BoE's rate-setting Monetary Policy Committee
held an "initial discussion" about changing the so-called
sterling monetary framework at their August meeting, minutes of
the discussion showed on Wednesday.
A BoE spokeswoman said a review would be handled by Minouche
Shafik, the new deputy governor for markets and banking.
Moyeen Islam, fixed income strategist at Barclays, said the
length of time needed for the review meant that the BoE would
keep paying interest on all reserves for around six to nine
months into an interest rate hiking cycle.
Economists and financial markets do not expect the BoE to
start raising interest rates until the start of next year.
"This is the first time the Bank to my knowledge has
explicitly said they intend to maintain effectively a floor
system of reserves in the early part of the rate cycle," Islam
Following the review, the BoE could return to its pre-2009
system of "reserves averaging", under which banks chose a
monthly target for reserves held at the central bank.
If they undershot or overshot reserves, they faced
penalties, giving them an incentive to instead use money markets
for managing their short-term liquidity needs.
The BoE suspended reserves averaging in 2009 because the
introduction of quantitative easing asset purchases meant the
supply of reserves reflected more the size of the stimulus,
rather than demand from banks.
Since then, banks have not been required to set targets for
Paul Fisher - who until recently was a member of the MPC
responsible for money markets - said in 2011 that a return to
reserves averaging was the most likely option.
* More details on the BoE's monetary framework can be found
(Editing by David Milliken and Susan Fenton)