The Bank of England's emergency offer of 5 billion pounds of 3-day loans was nearly five times oversubscribed on Monday as financial institutions scrambled for cash in the face of a global credit crunch.
The central bank's "exceptional" offer was a direct result of much tighter money market conditions and was aimed at bringing overnight interest rates down after a spike higher in the wake of the firesale of U.S. investment bank Bear Stearns .
"It was very heavily bid which is not surprising given the overnight bank rate," said Russell Silberston at Investec Asset Management.
"It underlines how determined central banks are to keep some sort of order in the short-dated cash markets."
Overnight sterling lending rates in the interbank market shot above 5.5 percent early on Monday, considerably higher than the Bank's base rate of 5.25 percent.
The Bank said in a statement that like other central banks it was keeping a close eye on market developments The key problem is getting confidence back as financial institutions, fearful of the losses on each others' books, balk at lending money to each other which in turn is choking the world financial system.
Central Banks Act
The U.S. Federal Reserve cut its discount rate late on Sunday to 3.25 percent and allowed the 20 primary dealers in U.S. Treasuries to use its window in a bid to calm market jitters.
But the weekend move ended up smacking of panic and stock markets around the world started tanking even as interbank lending rates surged, prompting the BoE action.
The Euribor rate for three-month unsecured lending in euros between European banks rose to a fresh two-month high of 4.652 percent on Monday from Friday's 4.617 percent.
The BoE said this was only the second such exceptional fine-tuning operation since the credit crisis began last summer.
The first was a 4.4 billion pounds two-day repo offered on Sept. 18.
The cash offer was nearly times five times oversubscribed with the central bank able to satisfy 21.19 percent of bids made.
Sterling extended its decline against the dollar after the initial BoE announcement on fears Britain's massive financial sector made it more vulnerable to disruptions in financial markets.
Analysts said the thinking was that if technical measures to reintroduce liquidity to markets fail to have the desired effect, the Bank of England would have to cut interest rates more aggressively.
The BoE has cut interest rates twice -- in December and February -- since the credit crisis began last August and is widely expected to do so again in May.
But it has been hampered from the kind of aggressive monetary easing -- where the Fed is expected to its main lending rate by a full point this week -- because of worries over soaring inflation.