[AndrewWoo]

GBP weakened yesterday following press reports discussing the possibility of the BoE cutting the interest rate paid on bank reserves at this week's policy meeting. Although cutting the bank reserve rate is a policy option, economists think that it is unlikely to be adopted this week for several reasons. First, it would require a substantial change in the BoE's operating procedures. Second, a cut in the Bank Rate from its current level of 0.5% would squeeze bank margins - the lending rates offered by banks would fall, but many deposit rates have already reached a floor. Third, the need for further policy loosening is at present unclear, and the effectiveness of QE in improving lending flows is still an open issue. Fourth, at the most recent Inflation Report press conference, Governor King was asked whether lowering the interest rate paid on bank reserves was an option, and replied that one lesson from the financial crisis is surely "never say never," but this option is not something BoE officials have raised unprompted.