GBP Money Markets: Stable liquidity conditions in 2026

The continuous quantitative tightening (QT) by the Bank of England (BoE) has pushed deposit rates relatively higher over the past years, but the impact may be more limited this year. When we look at the Sterling Overnight Index Average (SONIA) rate, we see a slight increase in the relative costs for banks attracting overnight funding over the past few months. In December, the spread between SONIA and the Bank Rate jumped by around 0.5bp, but has now settled around 2.5bp below the Bank Rate.

A significant number of banks pay close to the Bank Rate for overnight deposits, suggesting the competition for liquidity has increased. The 90th percentile of transactions is now even on the Bank Rate. Aggregate bank reserves are still around £650bn, well above the £460bn in 2020 before the restart of the BoE’s bond purchasing programme. But with stricter liquidity regulation in place, we expect the demand for bank reserves to remain structurally higher. As such, the preferred amount of reserves in the system to maintain healthy liquidity could be much higher than pre-Covid.

Despite the continued unwinding of the BoE’s balance sheet, we find that bank reserves have increased since October last year. The increase in bank reserves improves liquidity conditions and should help keep short-term funding rates range-bound. That also means that we might not see a material increase in SONIA this year. A side note hereby is that liquidity is not evenly balanced throughout the system, and some borrowers may still have to start paying more to attract short-term funding.

The increase in bank reserves can be attributed to a strong pickup in the BoE’s liquidity facilities, which is designed to keep liquidity ample. The short-term repo (STR) facility has now passed the £100bn mark and the long-term repo (ILTRO) facility is now above £70bn. Together they added £110bn of bank reserves in 2026, which is more than the reserves withdrawn because of QT. These facilities also help prevent sudden liquidity shocks as they are readily available against a range of collateral.

With bank reserves stabilising, or at least falling less quickly, we can expect other money market rates to see more range-bound trading, too. When looking at Treasury bills, we can identify ranges that capture most of the spread pickup versus SONIA swaps. After the year-end, we see that spreads on 3M and 6M T-bills have come down somewhat, back to their trading ranges from most of 2024 and 2025. Being closer to the lower bounds, we do expect to see a bit of a rebound higher in spreads, especially for the 6M tenor.