Bank of England Cash Injection

BoE cash injection to boost markets

19 September, 2007

The Bank of England (BoE) has announced it will inject £10bn into the UK money market. These funds will be auctioned off next week, in an attempt to bring three-month inter-bank interest rates down – even though the Bank previously stated that it was not its job to lower three-month rates. Another key feature of this move on the part of the BoE is that banks will be allowed to use a wider range of assets than usual as collateral, including mortgage debt.

The Council of Mortgage Lenders (CML) has welcomed the decision. Michael Coogan, director general, said: "This support should enable 3-month funding costs to reduce and get back to more normal levels. This is good news for lenders and for their customers, particularly those with mortgages linked to LIBOR for whom hefty increases in payments were looming."

Following the excessive increases in the London Interbank Offered Rate (LIBOR) over the past few weeks which have seen it climb above both the Base Rate and the emergency lending rate of 6.75 per cent – however it dropped overnight in response to the cut in US Federal rates. Banks have been loathe to lend to other banks as a result of the recent instability within the global markets and thus the problem escalated until it reached a head last Friday with Northern Rock’s announcement.

Ian Kernohan, economist at RLAM, commented: “This represents a U-turn on support for money markets and so when faced with the risk of a collapse in confidence, all talk of moral hazard has gone out the window. As every parent knows, it’s all very well to talk tough, but if you don’t follow up your credibility is damaged.”

Kinetic Financial Solutions

unbiased advice, exceptional service