The Bank of England does not plan any imminent change to its monetary framework by altering the interest rate it pays on commercial banks' reserves, say economists who attended a meeting with the BoE on Tuesday.
The meeting, hosted by BoE Deputy Governor Charles Bean, Chief Economist Spencer Dale and Executive Director for Markets Paul Fisher, was intended to give market participants a progress update on the 175 billion pound quantitative easing programme.
Economists at the meeting said the policymakers poured cold water on speculation the BoE is about to follow Sweden's Riksbank in cutting the remuneration rate on banks' deposits to enhance the effectiveness of the scheme.
"The monetary framework is liable to be altered at any time, but I had no sense that any change was imminent. There shouldn't be any presumption they were about to make any change," said one who was at the meeting.
He noted that one of the policymakers had said the central bank was "some way" from deciding whether it wanted to make any change.
Widespread market speculation that a move was imminent helped drive the yield on two-year gilts to an all-time low earlier this month. In fact, policymakers told attendees that it was only a secondary issue and was still being looked into by Bank staff.
They also told economists that they were unhappy with the way the market interpreted Governor Mervyn King's comments on sterling last week.
King was quoted as saying last week that the pound's weakness was helping to rebalance Britain's economy towards exports. Markets took that as a reason to sell the currency, driving it down to a five-month low against the euro.
But the pound rose on Tuesday and yields on short-dated gilts surged as news from the meeting trickled out.
By 1210 GMT, the yield on 2-year gilts was 11 basis points up at 0.88 percent, the highest in nearly a week. The pound rose a third of a cent against the dollar.
RESERVES TALK
Speculation the BoE would lower its remuneration rate, currently 0.5 percent, was triggered in August when King, in response to a question at the Inflation Report news conference, said it could help make quantitative easing more effective.
He expanded on the topic in a testimony to parliament earlier this month, saying offering a lower rate on reserves above a certain level might "make the banks work a little bit harder to try individually to convert some of those reserves into other assets". [ID:nLF280085]
Expectations a move was in the offing gathered pace after it emerged that BoE Governor Mervyn King held meetings with Sweden's Riksbank at the end of last week.
Sweden has imposed a negative intererst rate on banks' excess reserves — essentially charging institutions to park their cash — but the charges apply only in rare instances.
