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BOE Launches Extra Repo Operations After Liquidity Demand Surges

BOE Evaluating Repo Operations After Liquidity Demand Surges

(Bloomberg) -- The Bank of England is activating an emergency liquidity facility after banks’ demand for cash soared at its regular operation on Tuesday.

The central bank said it will run a Contingent Term Repo Facility on March 26 and April 2 in its latest effort to combat financial stress prompted by the coronavirus pandemic. The CTRF will lend reserves for a period of three months, and will compliment existing facilities, as part of the BOE’s efforts to help “support financial stability by reducing the cost of disruption to critical financial services.”

The launch comes after banks bid for 10.66 billion pounds ($12.6 billion) at a weekly operation Tuesday, and were alloted 7.2 billion pounds. Both numbers were the highest since the operations were restarted around 2016’s Brexit referendum, while demand outstripped supply for a second straight week.

BOE Launches Extra Repo Operations After Liquidity Demand Surges

“This step is designed to help alleviate frictions observed in money markets in recent weeks, both globally and domestically, as a result of the economic shock caused by the outbreak,” the BOE said.

“This will also allow participants to use the CTRF as a way to bridge beyond the point at which drawings can be made from the Term Funding Scheme with additional incentives for SMEs -- helping to support lending to the real economy as quickly as possible,” it said.

The BOE has not used the CTRF since it was established in 2014, although it ran a similar operation as recently as 2012. Its website states that it “is not in routine use, but is available to be used when market conditions or other factors mean a tool is needed in addition to our other facilities.”

While the weekly Indexed Long-Term Repo program operates as an auction, the BOE is able to set the price of the CTRF itself. In the coming operations, the BOE said the size “will be unlimited, and the price will be a fixed rate of Bank Rate plus 15bps.”

The BOE said that further operations will be announced as required, based on demand and market feedback. The central bank said earlier it was evaluating its operation after the spike in demand on Tuesday, which it said suggested a greater demand for liquidity insurance.

One explanation for the surge in demand may be that dealers were desperate for cash after having to absorb an abundance of gilts during a violent selloff last week.

“This would have clogged dealer balance sheets with bonds sold by funds required to meet margin calls and to satiate other needs for cash and now those dealers are using the bonds as collateral to get the liquidity they need,” said Rishi Mishra, an analyst at trading firm Futures First.

©2020 Bloomberg L.P.