LIVE MARKETS-Is the BoE back in the money?
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IS THE BOE BACK IN THE MONEY?
The Bank of England could make as much as $25 billion a year from its new system for providing reserves to banks, according to BMO Capital Markets, though they expect the central bank to make less and focus more on smoothly functioning markets.
The BoE said in a regular exchange of letters between Governor Andrew Bailey and finance minister Rachel Reeves, published Tuesday that it intended to end the full remuneration of bank's reserve balances, after reserves fall below the Preferred Minimum Range of Reserves.
It's all part of returning to a more "normal" state of affairs for bank reserves, which were shaken up by quantitative easing and quantitative tightening.
BMO says we could reach this point by the end of 2025.
"As banks will be paying for the reserves they demand in this framework, we expect that our operations will generate positive income in the future," Bailey said.
How much the BoE makes will depend on how it designs the new architecture, but Laurence Mutkin, head of EMEA rates strategy at BMO Capital Markets, has been doing some sums, published in a Wednesday note.
If the PMRR is at the mid-point of the latest estimates from the BoE, the BoE were to remunerate all reserves at zero, as it did before 2006, and Bank Rate were to average say 4% over the cycle, the spread would generate an average of some 18.4 billion pounds ($24.53 billion) per year, he says.
That estimate is probably on the high side, as the pre-2006 arrangement generated some unwelcome volatility, which Mutkin expects the BoE to want to avoid.
(Alun John)
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($1 = 0.7501 pounds)
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