- September 13, 2019
All You Should Know About Gilt Repo Interest Rate
The base rate charged by the Bank of England for secured overnight lending to other banks is known as BOEBR – Bank of England Base Rate. Then what is the meaning of Gilt Repo here? Let us discuss further.
Repo, if we expand, is the Repurchase Agreement. It is mainly a short term borrowing by commercial banks to meet their cash shortage.
- There is generally a list of eligible securities from which the borrowing bank can choose its convenient one to keep it with Bank of England. These securities are commonly known as Gilts. While lending money, the security which is kept in return acts as collateral.
Currently, the Bank of England base rate is 0.75%; which is too less. It was declared after the recent meeting in August 2019. The next meeting is scheduled to be on September 19, 2019. However, it is not necessary that the base rate will change in every meeting. Usually, it remains the same for years. It was at its lowest ever mark in August 2016 at 0.25%.
All this started in 1694. At that time bank rates were of many types. The rate they charged those days varied from 0.24% to 17%. It was considered a key interest rate. With the time this key interest rate changed frequently and so changed its name. And these changes are always recommended by the Monetary Policy Committee.
Different names given to this key interest rate are as follows:
- Minimum lending rate
- Minimum Band1 dealing rate (1981 – 1997)
- Repo rate (1997 – 2006)
- Official Bank Rate (2006 – till now)
In the UK, operations with Gilt repo started in Jan 1996. Till now, it is in use.
Who Determines This Rate?
The monetary policy committee of the Bank of England has the sole power to determine the gilt repo interest rate. The meeting of the monetary policy committee is held every month to discuss whether the interest rate should be changed or not.
Why Change It?
Whether to change the interest rate or not is whole the committee’s decision. Here we will discuss why they need to change the gilt repo rate from time to time. Actually, all this is more or less connected with our economy. Inflation is the main reason behind these rates fluctuations. And these rates should not be very low as well as very high. Both the situations are harmful to the economy and can result in financial crisis. The state of our economy will define the level of inflation.
Since low rates, up to some extent, have their benefits too. At least for the people who have lost their job, it proves to be a big help. Due to low-interest-rate, those needy people will be able to spend some money on the essentials. If we see the history, rates have been decreased many times only to help the economy get back on its feet.
How Does It work?
Gilt repo is mainly a practice of selling gilts and then being into an agreement to repurchase them with a fixed price and also for a fixed time. With this process, the problem of temporary cash shortfall can be solved. As borrowing can be done against gilts to gear our portfolio investments.
Effects Of Gilt Repo
Gilt repo interest rate is very important for commercial banks as well as for the Bank of England. Various effects can be like:
- Bank of England controls liquidity as well as money supply with this rate only.
- Commercial Banks borrow money from the Bank of England according to this interest rate.
As decided by the Bank of England, if this rate is low, commercial banks can borrow more and hence liquidity will increase and also banks will charge lower interest further from customers.
But in reverse, if it is high, it will be costly for Commercial Banks to borrow from the Bank of England. As a result, Banks will also tend to increase the interest rate and charge high from their customers and liquidity in the market will also be affected.
The repo rate set by the Bank of England is gilt repo rate. Sometimes it is also known as Base Rate. It is defined as the rate at which all the commercial banks in England (like Lloyds, NatWest) borrow short term money from The Bank of England. The higher be the rates, the more the cost will be the borrowing for the commercial banks. Although the Monetary Policy Committee always tries their best to keep those rates which are beneficial for the economy in every manner.
But whatever be the rates, Gilt Repo is the best source for commercial banks to have overnight secured borrowing.
The 15-year gilt yield decreased -27 basis points to 0.71% during August 2019 with providers of standard annuities decreasing rates by an average -3.63% for this month and we would expect rates to rise by 1.13% in the short term if yields do not fall.