BoE gives banks more borrowing flexibility

The Bank of England has given banks greater flexibility on how much cash they can borrow without being penalised.

At the start of each month, banks tell the BoE how much they will need in reserves to cover them for the difference between the amount of money they receive and what they pay out.

Now, as the crisis engulfing world credit markets continues, banks have been allowed to raise their reserves by £4.4 billion.

Banks' reserves at the Bank of England can now be allowed to fluctuate by 37.5 per cent on either side instead of the normal 1 per cent band.

On Wednesday, BoE Governor Mervyn King made clear in a letter to Parliament's Treasury Committee that raising banks' reserve targets was designed to lower overnight rates.

However, he said it was not to ease the logjam in term lending rates, which he sees as a problem for the market to sort out.

Mr King said the extra reserves had been necessary because there were grounds for suspecting banks may have underestimated their demand for reserves at the start of the current maintenance period.

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