BoE increases target level of reserves

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In a sign that the worst of the credit squeeze is not yet over, the Bank of England announced yesterday an increase in the target level of reserves held at the Bank by the 60 or so financial institutions entitled to do so.

These reserves are used by banks for settlement of interbank payments and liquidity management, that is to ensure they have enough cash to cope with customers' needs, for example to accommodate unexpected end-of-day payment inflows and outflows.

The target figure for the period from today to 5 December is £21.2bn. The new figure is about £3.6bn more than the aggregate for the past month, and the highest since June 2006.

The Bank's post credit-crunch policy of permitting a 30 per cent variation of the stated targets either way, which the banks can draw upon without penalty, ensures that, barring an episode such as the run on Northern Rock, most of the extraordinary demands for liquidity should be met.

However, the continuing existence of the 30 per cent bands, replacing the traditional convention of a 1 per cent variation, and the banks' setting of relatively high targets may indicate an elevated fear about the need for cash over the coming weeks, and may be taken by some in the markets to be a worrying signal.

Simon Ward, chief economist at New Star Asset Management, commented: "I think the banks are concerned about unforeseen demands on liquidity... and they have an incentive to hold greater than average levels of reserve to meet demands."

He added that it was not possible to speculate as to precisely why the banks have upped their reserve targets for November.

The Bank of England does not release data on the targets set by individual institutions.

The Monetary Policy Committee will announce its interest rate decision at noon today.