The Bank of England's $9 billion money-market infusion lowers the overnight loan rate and marks a second reversal of its non-interventionist approach
The Bank of England injected £4.4bn in emergency loans into the financial system yesterday, marking yet another departure from the hard line that the central bank had initially taken on the crisis.
The Bank said that it released the funds -- its first exceptional finetuning of the market since the global credit crunch began -- to offset the spike in overnight lending rates that worsened in the wake of the run on Northern Rock.
The injection brought the overnight lending rate down to 6.14250 per cent yesterday from 6.46875. The three-month Libor rate -- the key rate at which banks will lend to each other -- continued to move down as signs increased of easing in the commercial paper markets.
The move was the clearest manifestation yet of a major reversal in the central bank's non-interventionist approach to the crisis in the global credit markets.
It first broke with its policy this week when along with the Treasury and the Financial Services Authority it agreed to guarantee all deposits held by Northern Rock, where clients have pulled more than £2bn out in a run on the bank amid worries that it would collapse.
"The Bank of England began being very concerned about moral hazard and being seen as bailing out businesses. But they totally misjudged how the newsflow from Northern Rock would ripple through the depositors and the rest of the system," said Philip Lawlor, portfolio strategist at Nomura.
"Now they have moved into the mode of keeping the banking system running. This is a bit of humble pie."
Other small mortgage lenders such as Alliance & Leicester and Bradford & Bingley -- whose market values were severely dented amid suspicions that they were also vulnerable -- saw their shares recover yesterday after the Government issued its blanket support of Northern Rock.
The Bank of England said it would make the £4.4bn available over a two-day period, and that it would also make that amount available for a seven-day period from Thursday.
Until this week, Mervyn King, the Bank of England's governor, has taken a markedly different approach to the European Central Bank and the United States Federal Reserve, preferring to stay on the sidelines while his counterparts in America and Europe pumped in hundreds of billions of dollars in an effort to alleviate an acute shortage of funds available in the debt markets.
In a statement, the Bank said: "The Bank's objective is to ensure that secured overnight rates should be close to Bank rate."