Why Bank of England is turning up the volume on Sonia

You're going to be hearing a lot more about Sonia.

Not the chirpy Scouse songstress, sadly, but the rather less musical Sterling Overnight Index Average.

But there is a tenuous connection between Sonia the pop star and Sonia the interest rate.

Pop star Sonia's best known hit, in 1989, was You'll Never Stop Me Loving You.

Interest rate Sonia, by contrast, is getting a big push from the authorities in a bid to stop the financial markets loving Libor.

The latter - an acronym for the London Inter Bank Offered Rate - is seen as tarnished following attempts to rig it by various market miscreants before and during the financial crisis.

The aim is that Sonia will eventually displace Libor as the key measure of the price at which banks lend to each other.

Monday saw a crucial step taken in that direction as the Bank of England assumed responsibility for running Sonia.

Why does all that matter? Simply because Libor - and now its replacement - is the benchmark on which millions of financial transactions are anchored.

It underpins transactions worth hundreds of trillions of pounds every day, including the pricing of 'swap' rates in the derivative markets, which in turn form the basis for the interest rate on mortgages and other loans.

So it is absolutely vital it is an accurate interest rate in which financial markets can have confidence.

At the same time, crucially, the Bank is overhauling the way Sonia is calculated.

Sonia, which has been running since 1997, was previously a weighted average of all unsecured overnight sterling transactions carried out by brokers.

The problem with that was that it did not measure every sterling transaction taking place in the inter-bank market. It was, in the Bank's words, based on only "limited transaction volumes".

The new version will be based on a broader measure of activity.

Significantly broader, in fact: the Bank estimates the new method will capture some £50bn worth of transactions, daily, that did not go into the previous calculation of Sonia.

In theory, it ought to be a vast improvement not only on the previous measurement of Sonia, but also on Libor, which was calculated by the old British Bankers Association, a trade body since replaced by UK Finance.

The big problem with Libor is that it too was supposed to reflect the cost of borrowing between banks but was not based on many actual transactions.

It was instead based on the daily submissions of banks to the BBA - submissions that, all too often, were based on "expert judgement".

The Libor scandal exposed the uncomfortable truth - which was that many banks were fixing their submissions in an attempt to drive the overall Libor rate in one direction or another.

So, in theory, the new Sonia rate should have a huge advantage over Libor.

It will be based on a comprehensive sweep of transactions actually taking place in the market - as opposed to a panel of banks coming up with their best guess on what the cost of inter-bank lending is.

As Sir Dave Ramsden, the Bank's deputy governor for markets and banking, put it: "Today's implementation of the reforms to Sonia is an important milestone in the Bank's delivery of improvements to the resilience and effectiveness of financial markets.

"The reforms improve the sustainability and representativeness of this key piece of the sterling market infrastructure."

We haven't quite seen the back of Libor yet but, from 2021, the Financial Conduct Authority, the chief City regulator, will no longer be requiring banks to submit Libor rates.

The big question is whether, in due course, it proves possible for Sonia to be rigged in the way Libor was.

The Bank's reforms to Sonia should render that impossible - but, it should be remembered, have been designed specifically to prevent manipulation of the type that happened with Libor from being repeated.

Traders are creative souls.

Someone, somewhere, will eventually be tempted to have a go at rigging Sonia if the potential rewards are great enough.