Bank of England to auction £10 billion

by Gill Montia

Story link: Bank of England to auction £10 billion

The Bank of England (BoE) has reassessed its position in relation to the problems on the money markets and is prepared to alleviate the credit shortage by injecting £10 billion into the markets.

The move is aimed at reducing the London Interbank Offered Rate (Libor), which is the interest rate applied to inter-bank lending.

Libor has been increasing since the US sub-prime mortgage crisis made banks reluctant to lend to each other because of uncertainty about exposure to the crisis.

Analysts have been surprised by the BoE’s decision because previously it had taken the position that any action to lower three-month Libor rates would be beyond its mandate.

However, three-month Libor has risen above both the BoE’s base rate of 5.75%, and its emergency lending rate of 6.75%.

The rise in Libor led directly to the difficulties of Northern Rock, the UK’s fifth largest mortgage lender, which was forced to seek emergency funding from the bank at the end of last week.

Libor has also been behind the decision by many High Street mortgage lenders to increase interest on their variable rate products, for new customers.

Next week the BoE will auction £10 billion. It has pledged to hold two further auctions, at weekly intervals, with the amounts yet to be decided.

The interest rate paid on the funds will be as bid by participants, subject to a minimum rate set at the bank’s emergency funding rate of 6.75%, 100 basis points above the 5.75%.

Three-month Libor rates fell to 6.55%, down from 6.75%, following the bank’s announcement and this should, in turn, lower variable rate mortgage costs.