Europe Economy

BoE Breaks Silence, Acts to Calm Money Markets


The Bank of England broke its silence on Wednesday over the current storm engulfing world financial markets and took steps to bring overnight interest rates down.

Commercial banks will from Thursday up their aggregate reserves at the central bank by 6% to 17.630 billion pounds -- giving them greater scope to borrow at the BoE's main lending rate.

Moreover, the BoE will allow them to raise their reserve targets by a further 25% next week, a total of some 4.4 billion pounds, without being penalized.

The BoE said this should take some of the upward pressure off overnight lending rates which have been shooting up in response to global concerns about banks facing huge losses because of lending to the high-risk U.S. subprime sector.

But it stressed these measures were not aimed at targeting three-month interbank lending where interest rates have hit a 8-1/2 year high, more than a full percentage point above the BoE's main lending rate, leaving some dealers disappointed.

"The BoE has recognized the tension in the money markets and is now prepared to take action to alleviate some of those stresses," said Philip Shaw, chief economist at Investec.

"But markets have got a little bit spooked by the Bank's comments that the measures are not intended to bring three-month interbank lending rates down."

Strategists said the comments suggested the BoE was not about to flooding the monetary system with cash as the U.S. Federal Reserve and European Central Bank have been doing.

"The market has taken this with a negative view. It suggests the BoE is not going to do anything along the lines of the Fed in cutting the rate on its standing facility and I don't think we'll see them increasing the terms of borrowing available to a 3-month maturity," said Francis Diamond, strategist at JP Morgan.

All steps announced on Wednesday are in line with the BoE's normal money market framework, the central bank said.