The Bank of England has announced that it will inject £10bn into the money markets in a bid to lower three month Libor with further amounts to be added on a weekly basis.
The BoE says it will hold three further auctions at weekly intervals with the amounts to be decided later. Banks will be allowed to offer a wider range of collateral than is normally allowed, including their mortgage debt.
This comes after weeks of the BoE refusing to intervene and stating that it was not its job to lower three month Libor rates.
Three month Libor has stood at over one per cent higher than bank base rate for the last few weeks. The spread between bank base rate and three month Libor reached a 20-year high at the beginning of the month.
The BoE says: “This measure is being taken in order to alleviate the strains in longer-maturity money markets.”
Three-month Libor rates fell to 6.55 per cent today following the bank’s move, from 6.75 per cent on Tuesday.
CML director general Michael Coogan says: “This welcome support should enable 3-month funding costs to reduce, and get back to more normal levels. This is good news for lenders and for their customers, particularly those with mortgages linked to LIBOR for whom hefty increases in payments were looming.”
RLAM economist Ian Kernohan says: “The Bank of England has announced that it will auction £10bn in 3 month sterling funds next week, with the lending taking place against a wider range of collateral than accepted for borrowing at the standing facility. This represents a U-turn on support for money markets and so when faced with the risk of a collapse in confidence, all talk of moral hazard has gone out the window. As every parent knows, it’s all very well to talk tough, but if you don’t follow up your credibility is damaged.”