Because the net impact of reserves is close to zero, we don’t anticipate any lasting effects and November should see better conditions. In fact, the strong pickup in the liquidity facility reflects a sound working of the liquidity plumbing set up by the BoE. The tightening in overnight markets reflects the need to bridge the gap between moving liquidity from one funding source to another with slightly different maturities. Combine that with regular month-end effects, and seeing some tightness was entirely expected.
We may, however, see more tightening again in money markets towards year-end as the level of reserves has come down drastically since last year. We can see that the SONIA rate has continued moving closer to the Bank Rate, suggesting the competition for deposits, and thus liquidity, has increased. More notable may be the distribution of the SONIA sample. The tenth-highest percentile of deposit rates was at the Bank Rate or above, whilst the tenth lowest was some 8bp below. This suggests that certain banks are much more willing to pay for reserves than others. Such effects can become more pronounced during year-end, and we could see more volatility as a result.
