Bank injects another £4.4bn into money markets

Panic over crisis-hit mortgage lender Northern Rock today forced the Bank of England to pump an extra £4.4 billion into money markets.

The Bank hopes to ease the pressure on overnight lending markets between banks, where rates have soared since it stepped in to secure Northern Rock last Friday.

The Bank said: "The action is being taken to offset the disturbance to conditions in the short-term money markets following the announcement of lender of last resort assistance to Northern Rock.

"Since then, secured overnight money market rates have again been unusually high relative to bank rate."

The "fine-tuning" exercise satisfied less than 20% of demand, with commercial lenders bidding for more than £25.4 billion.

This latest move to unfreeze credit markets comes after the Bank increased available reserves by 6% to £17.6 billion for September.

The bank offered another £4.4 billion to markets last Thursday - equivalent to 25% of reserves - with the same amount also on offer in two days' time.

The Bank of England has acted because it wants to bring overnight borrowing rates between banks back down to near the current base rate of 5.75%.

Its previous intervention eased rates to around 5.9%, but the recent turmoil over Northern Rock saw inter-bank rates spike back up to nearly 6.5% yesterday.

The overnight money markets are crucial to banks to fund day-to-day borrowing, but a liquidity freeze has been caused by banks' unwillingness to lend to each other because of fears over exposure to losses on US sub-prime mortgages.

Northern Rock's woes have again shaken the fragile confidence in money markets. The mortgage lender was forced to go to the Bank of England because it is reliant on the credit markets to fund around three-quarters of its mortgages.

The Bank is focused on resolving the problems in short-term lending, but has previously stressed that the higher rates seen in the longer term lending markets stemmed from the current difficulty in valuing financial instruments - such as the mortgage-backed bonds now distrusted by the market - "rather than a lack of central bank liquidity".

The Bank's Governor, Mervyn King, is set to face questions from MPs on the Treasury Select Committee over his handling of the credit crunch and the Northern Rock crisis on Thursday.