The credit crunch has made it harder for banks to get hold of funding from money markets. By having a bigger cushion at the BoE, 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 the higher of 2.5 billion pounds (S$8.11 million) or five per cent of sterling eligible liabilities.

Previously, the ceiling had been set as the higher of 1 billion pounds or two percent of eligible liabilities.

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

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

The BoE said it was making the changes 'in view of the increase in the reserves target set by reserves scheme members in recent months, and the potential for increase in future months'.

'Reserves scheme members wishing to set a target for the new maintenance period in excess of their current ceiling may do so on Tuesday 6 May,' the BoE said. -- REUTERS