BoE raises reserve limits to help banks

LONDON (Reuters) - Banks will be allowed to hold more funds at the Bank of England with effect from May 8, the central bank said on Friday, giving them greater scope to meet liquidity needs on any given day.

The global credit crunch has made it harder for banks to get hold of funding from money markets, with interbank lending rates climbing well above official borrowing costs.

By having a bigger cash cushion at the central bank, commercial banks will not have to rely so heavily on markets if they need to source cash quickly.

The BoE said it would raise its reserves target ceiling for banks to 2.5 billion pounds or five percent of sterling eligible liabilities, whichever is higher.

The ceiling was previously 1 billion pounds or two percent.

"Given the uncertainty around liquidity, banks have been choosing to hold more reserves at the Bank of England," said Philip Shaw, an economist at Investec.

"A higher reserves target gives commercial banks more flexibility. They can draw down on that bigger cushion."

However, banks are still required to keep within their strict reserves limits on average across the monthly periods for which they are set.

The BoE has been under pressure to do more to help ease the lending squeeze that has driven the global economy to the edge of a sharp slowdown and already forced the British government to nationalise one failed mortgage lender, Northern Rock.