Capital Economics believes that the relatively subdued demand for yesterday’s auction may not mean that banks do not want extra cash but that they are unable to get their hands on it.
The firm says that it is clear the strains in the money markets have recently grown and that this is spilling over into the wider economy.
Capital Economics UK economist Paul Dales says: “Accordingly, the Bank will have to announce more initiatives to solve the problems in the financial markets and cut interest rates much further to protect the wider economy.’
It is thought the Government will announce today new proposals to bring back liquidity into the market. This is widely believed to mean that the Bank of England will accept an even wider range of securities as collateral, allowing banks to swap securities for gilts or perhaps even buying mortgage-related securities outright.
Capital Economics points out that under the rules of yesterday’s auction, each bank was only allowed a maximum of £3bn of the £15bn on offer.
Dales says: “Those banks who really need the extra liquidity may simply have not been allowed enough of it.”
“While the Bank has already taken a number of steps to ease the strains in the markets, its policies are still more restrictive than those of the Fed and the ECB. Both the Fed and the ECB are accepting an even wider range of securities as collateral. What’s more, the Fed is allowing banks to borrow US Treasuries in exchange for mortgage-related securities. The Bank’s more modest response probably explains why the strains in the UK’s market appear greater than elsewhere.”