Bank of England offers funds to lenders

The Bank of England is trying to lessen the impact of a global credit squeeze and high borrowing costs with an offer of an extra £10 billion in funds.

If borrowing costs remain high, there is a possibility that this could result in being passed on to consumers, slowing economic growth. The target is to reduce the cost of lending between retail and commercial banks, which has soared in the last month.

It is one of five central banks that have promised to inject £49 billion of emergency cash into money markets. Others involved are the US Federal Reserve, the European Central Bank and the national banks of Canada and Switzerland.

Earlier this week, the US Federal Reserve made $20 billion available through auction but did not divulge how many banks took advantage of the extra funds. Henry Paulson, US Treasury Secretary, said that there was no ’silver bullet’ to solve the credit market problems.

According to many analysts, the extra cash is required because the interbank lending rate had remained high in spite of interest rate cuts here in the UK and in the States.

In London, a key banking rate, called the Libor (London Inter-bank Offered Rate), fell for a third session yesterday indicating that the central banks’ rescue plan may be having an impact. The Libor, fell slightly to 6.431%, compared with 6.627% on Wednesday last week when the central banks revealed their rescue plan. The lower the rate, the cheaper it is for banks to borrow money.

The primary reason that banks have been reluctant to lend to each other is a downturn in the US property market. An increase in mortgage defaults and bad debts has driven many banks to cut the value of their mortgage investments, costing them billions of dollars.

Consequently, the banks fear that they might need any spare cash they have to cover their losses.

Discuss this in the Finance Markets forums

Story link: Bank of England offers funds to lenders