* BoE policymakers say no remuneration rate cut imminent
* BoE unhappy with market interpretation of King's stg remarks
* Policymakers say remuneration rate cut a "second order measure"
(Adds reaction, detail)
By Fiona Shaikh
LONDON, Sept 29 (Reuters) - The Bank of England does not plan any imminent cut in the interest rate it pays on commercial banks' reserves, policymakers told economists on Tuesday, quelling weeks of speculation and driving short-gilt yields to a 2-week high.
The seminar, hosted by BoE Deputy Governor Charles Bean, Chief Economist Spencer Dale and Executive Director for Markets Paul Fisher, was intended to give market participants a progress update on the 175 billion pound quantitative easing programme.
But the main question on analysts' lips was whether the central bank was going to follow Sweden's Riksbank in cutting the remuneration rate on banks' deposits to enhance the effectiveness of the scheme.
"The monetary framework is liable to be altered at any time, but I had no sense that any change was imminent. There shouldn't be any presumption they were about to make any change," said one economist who was at the meeting.
He noted that one of the policymakers had said the central bank was "some way" from deciding whether it wanted to make any change.
Policymakers also told the meeting they were unhappy with the way markets had interpreted comments on sterling by BoE Governor Mervyn King, economists said.
Speculation the BoE would lower the rate it pays banks to park their cash, or even, like Sweden, impose a charge, had sent yields on 2-year gilts to a record low in recent weeks.
But in fact, policymakers told attendees that it was a "second order measure" and was only being looked into by Bank staff.
Yields on two-year gilts jumped 14 basis points -- one of their biggest one-day moves in recent months -- and short-sterling interest rate futures plunged as it became clear policymakers were not yet ready to alter the monetary framework.
"It's not something they think is particularly critical at the moment," said John Wraith, head of sterling rate product development at RBC. "Down the line I'm sure it's an option they would consider. I think at the moment they don't see it as their priority."
CASH FLOW PROBLEMS
The idea of cutting the rate on banks' reserves was first floated in August, after Swedens' move and amid growing concern the BoE's asset purchase programme was not having much effect on bank lending or on broad money supply growth.
BoE Governor Mervyn King triggered speculation in August about a cut in the rate from the current 0.5 percent, when, in response to a question at the Inflation Report news conference, he said it could help make quantitative easing more effective.
He expanded on the topic again earlier this month when questioned in a testimony to parliament, saying offering a lower rate on reserves above a certain level might "make the banks work a little bit harder to try individually to convert some of those reserves into other assets". [ID:nLF280085]
And expectations a move was in the offing gathered pace after it emerged that BoE Governor Mervyn King held meetings with the Riksbank at the end of last week.
But there was no mention of the subject in minutes to this month's monetary policy meeting, and economists said they were told on Tuesday that King only spoke about it because he was asked, not because there are any plans afoot.
"One policymaker expressed concerns about the effect of zero rates on the money market," said another attendee of the seminar. "So the message I took away was that the changing of remuneration is an open option but it's definitely not a done deal, as the market has come to believe."
But with much of the money the BoE has spent on buying gilts and corporate bonds ending up back on its books, and data on Tuesday showing that broad money supply growth remains weak, the question remains how to get cash flowing again.
Some analysts say cutting the remuneration rate is not the answer.
"As the Riksbank's experience in recent months has also shown, a lower overnight rate would not eliminate banks' concerns about liquidity and credit risk and it may have the opposite effect on longer term borrowing costs by raising investor expectations of future rate hikes," said Lena Komileva, G7 market economist at Tullett Prebon. "None of this would help the restoration of normal credit flows in the UK economy." (Reporting by Fiona Shaikh, editing by Mike Peacock)