Bank changes way interest rates are set

The Bank of England will alter the way interest rates are set next month but it intends to give the City's six discount houses up to two years to adapt to the new procedures by introducing a package of transitional arrangements.

The discount houses, which are specialist banks, have had a monopoly in daily dealings with the Bank of England in the bill market, where interest rates are set.

But, as the Bank signalled last December, it intends to open up the market to a wider range of financial institutions and also make use of the growth of gilt repos - debt backed by government bonds.

Ian Plenderleith, executive director of the Bank of England, said the measures "should help to enhance the efficiency and competitiveness of the sterling money market in London".

The changes being implemented barely differ from those proposed in December despite the wide-ranging comments the Bank received from the markets about the plans.

"The main changes in December will be implemented as then proposed," Mr Plenderleith said. Some of the technical details had been "fine-tuned", he said.

From 3 March banks, building societies and securities firms which are active in gilt repos or bill markets will be able to take part in the daily money market operations provided they meet certain criteria.

Mr Plenderleith said the Bank had received applications from institutions wishing to become counter-parties and said that later this month the Bank would conduct "dress rehearsals" of the new procedures.

The Bank's daily money market operations are a closely watched ritual in the City as they can signal changes to official interest rates.

Until now they have taken place at 9.45am, noon and at 2pm, with a late lending facility at 2.45pm.

The new measures, published yesterday in a Bank of England paper, will see the daily operations take place at 9.45am, noon and 2.30pm, 10 minutes earlier than originally proposed.

A late repo facility, which the Bank originally proposed to offer around 3.30pm, will be made available between 3.50pm and 3.55pm, by which time settlement banks will have a clearer view of their liquidity positions.