Squeeze prompted BoE rush

Yesterday’s BoE figures showed banks borrowed a daily average of £3m in overnight money from its standing lending facility in the month ending on July 9.

The last time banks needed its was in the period ending April 8, 2009, when institutions borrowed a daily average of £43m.

The facility is intended for use only in exceptional circumstances – for example, if a technical glitch has prevented a bank from settling its books at the end of a day – and institutions must pay a premium to borrow funds.

The rate payable to use the facility is 0.75 per cent, 25 basis points above official interest rates.

The BoE does not say how much was borrowed at any one time.

Analysts said yesterday’s figures might reflect an instance at the end of June, when overnight money market rates suddenly shot up for no discernible reason.

On June 30, the Sterling Overnight Index Average rate jumped to 0.7368 per cent from 0.5307 the previous day – a spike of almost 21 basis points and unusually large, even for a month or quarter-end.

Francis Diamond, a strategist at JP Morgan, said the quarter-end effect was never more than five basis points. “I did hear there were some European and domestic banks that had a bit of a squeeze for overnight funds that day. It suggests it’s not a funding issue in the market, just a one-off demand squeeze on that day.”