Bank of England pumps £20bn into money markets

Sep 16 2008

The Bank of England pumped an extra £20 billion into short-term money markets today - four times the sum seen yesterday after Lehman’s collapse.

In a further sign of pressure on the financial system, banks put in bids worth £58.1 billion for the reserves, which were on offer on a two-day basis.

Banks placed bids totalling £24.1 billion for Monday’s additional £5 billion, which was the first such move by the Bank since March, when markets were rocked by the bail-out of investment bank Bear Stearns.

The Bank said today’s action was being taken “in response to conditions in the short-term money markets this morning”. The auction comes alongside the Bank’s regular weekly operation on Thursdays.

The European Central Bank has also made further funds available to financial institutions. The coordinated move by the banks is an attempt to combat the latest seizure in money markets panicked by Lehman Brothers’ woes.

Since the credit crunch, banks nervous of losses in the financial fall-out from the collapse of the US housing market have hiked the rate at which they lend to each other.

This has made loans and mortgages scarcer and more expensive, hitting the UK housing market and the wider economy.

Every fresh jolt to the system renews pressure on the markets, despite initiatives such as the Bank of England’s special liquidity scheme.

The European Central Bank also allocated 70 billion euro (#55.62 billion) in additional funds, while the US Federal Reserve pumped a further 50 billion US dollars (#27.8 billion) into the US financial system today.