BOE cash demand hits record high

UK banks continued their unprecedented pursuit of cash from the Bank of England (BOE), replenishing liquidity being depleted as policymakers persist in offloading bonds amassed during years of quantitative easing, Bloomberg reported.

Banks availed themselves of £17.2 billion ($21.9 billion) in funding via one-week repurchase agreements, or repos, marking an increase from £16.2 billion and marking the sixth consecutive week of record demand.

The BOE’s bond disposals have diminished the surplus cash in the economy to its lowest level since 2021, prompting many analysts to advocate for an end to the policy. They express concerns that a substantial drop in liquidity could escalate borrowing costs in money markets and hinder the BOE’s capacity to lower rates.

“We may have reached the point where reserves are tipping over from being ample to scarce,” remarked Peter Schaffrik, global macro strategist at RBC Capital Markets, while adding, “but it’s still not conclusive.”

However, Governor Andrew Bailey views the cash bids as “encouraging,” indicating his inclination for the BOE to meet the financial system’s liquidity requirements through repos rather than bond purchases. He asserted that doing so would eliminate the interest-rate risk borne by the bank, which is currently resulting in losses on its holdings.

Thus far, there is no indication that the BOE’s quantitative tightening programme, referred to as QT, is exerting excessive pressure on market rates. The premium over the Bank Rate that investors pay to access cash in the repo market stands at just one basis point, down from as high as 10 basis points at the beginning of the month.