Bank of England plans expanded repo facilities to avert money market crunch

By David Milliken

LONDON (Reuters) - The Bank of England said on Monday that banks should get ready to make greater usage of its repo facilities as it sells down its government bond holdings, and that it would also seek to make its six-month repo more attractive.

Repos, or repurchase agreements, allow banks to temporarily swap bonds they own for cash from the BoE, helping to keep market interest rates in line with the central bank's policy rate.

"Both we, the Bank, and you, the market, need to prepare ourselves for increased usage of both our short-term and long-term repo operations," the BoE's Executive Director for Markets, Victoria Saporta, said in a text published by the central bank.

The BoE is reducing at a pace of 100 billion pounds ($129 billion) a year its holdings of government bonds bought between 2009 and 2021 as part of its quantitative easing stimulus. This drains cash from the financial system, potentially putting upward pressure on overnight interest rates.

Adding further pressure is the end of a separate BoE scheme which offered banks cheap credit to lend to small businesses.

Cash reserves held by banks at the BoE currently total just over 765 billion pounds. In May, BoE Governor Andrew Bailey said they would need to fall to between 345 billion and 490 billion pounds to put regular upward pressure on interest rates, based on a financial market survey.

However, Saporta - in a speech to be delivered to the Association for Financial Markets in Europe - said there was uncertainty around the accuracy of those estimates.

"We could in some scenarios be there relatively soon," she said. "It's important therefore that our facilities are robust to this uncertainty, and that firms step up their preparations to ensure they are ready to use them sooner rather than later."

Last week the BoE's Short-Term Repo had a record jump in usage to 29 billion pounds.

Saporta said the increased use was welcome. The BoE's market intelligence did not suggest that the financial system was already near its preferred minimum range of reserves but it could be reached as soon as next year, she added.

The BoE would also aim to increase usage of its Indexed Long-Term Repo facility, which offers cash for six months and accepts a wider range of collateral than the Short-Term Repo.

"We are currently reviewing the calibration of the ILTR to ensure it can play this role effectively. We will be engaging with the market later this year on this," Saporta said.

($1 = 0.7736 pounds)

(Reporting by David Milliken, Editing by Kylie MacLellan, Kirsten Donovan)