Uk Gilt Repo Market Swells

The Bank of England said the gilt repo market - which was introduced in January this year - has grown to about £60bn by the end of August, with daily turnover in gilt repos of at least œ15bn.

The growth sets the scene for reform of UKs money markets, making it more likely that gilt repos - bond sale and repurchase agreements - could be used as a tool to control daily money market conditions and interest rates in the UK.

Such a move would bring UK in line with other European countries and make it easier to adopt a repo-based system of monetary policy if it were to join the European single currency in 1999, the scheduled start date, or later. It would also strengthen UKs chances of remaining an important centre for money market operations in the European single currency area, even if it stays out of monetary union.

The figures come as a potentially damaging split has emerged between international investment banks and central bankers over how European monetary policy would be conducted in Emu.

The row revolves around what securities would be eligible to be used in the repo-based system of monetary policy expected to be used in the single currency area after 1999. The disagreement means some banks could steal a competitive march over others in Emu. Central bank officials are working out how monetary policy would be conducted after 1999. The most likely plan is that interest rate changes would be made through a European-wide repo market.

Under this system, the European central bank would manage liquidity in the continents money markets by buying or selling bonds at a set interest rate. The repo interest rate would be allowed to move within a corridor, along the lines the Bundesbank carries out monetary policy in Germany.

The European central bank would operate in the repo market on a regular basis, buying and selling bonds with a large group of banks and investment institutions to set money market interest rates. But there would probably be an additional core group of banks which the central bank could call on in times of stress to carry out large emergency repos. Some countries at present allow only government-backed bonds to be bought and sold in the repo transaction.

But countries such as Germany allow other high quality private sector bonds to be used. European central banking officials indicated at a meeting in Brussels last month that high quality non-government bonds may be eligible under the new system.