The Bank of England pumped an emergency 4.4 billion pounds ($9 billion) into money markets on Tuesday to bring overnight interest rates down after they had shot up in the wake of the crisis engulfing Northern Rock.
Overnight rates hit 6.5% on Monday -- 75 basis points above the BoE's official rate -- on concern the troubles at Northern Rock, Britain's fifth-biggest mortgage lender, could spread to the wider banking sector.
The BoE's offer of extra liquidity -- its first emergency tender since the central bank's reform of its money market operations in May last year -- was heavily oversubscribed. Only 17.3% of bids were successful but overnight rates fell.
"It looks to be taking some of the pressure off the overnight rate," said John Wraith, head of rates strategy at RBS.
Last week, Northern Rock had to seek an emergency funding line from the BoE which prompted a run on deposits that may be easing now after the government had to step in on Monday and guarantee people's savings.
The BoE said the extra cash on Tuesday was a direct result of the troubles at Northern Rock pushing up overnight rates.
"The Bank of England has made it clear it is not prepared to add longer-term money or change its collateral rules but it is prepared to act to bring the overnight rate down," said Wraith.
The BoE also allotted 2.85 billion pounds in variable-rate long-term repo operations on Tuesday.