Bank of England promises 10bn of extra Christmas liquidity

The Bank of England acted again to soften the worst effects of the credit crunch yesterday, announcing that it would be lending 10bn to the commercial banks at the base rate of 5.75 per cent for a five-week period, rather than for the usual seven days.

Economists said that part of that move could be put down to the usual demand for reserves that comes at the year end as the banks "window dress" their balance sheets, a more acute concern this year than in the past. However, the injection also reflects the tougher conditions commercial institutions are enduring. This week, the London interbank offered rate (Libor) the price at which the banks lend money to one another rose to six-year peaks for the euro and multi-month highs for sterling and the dollar.

The Governor of the Bank, Mervyn King, was at pains to tell the financial community that he was by their side following criticism in recent months that he has not done as much as his international counterparts to ease liquidity pressures.

"Given the continuing fragility in the banking system, there is a risk that money markets will tighten over the end of the calendar year," Mr King said.

"To assure banks of liquidity over the year-end, the Bank will be offering a substantial proportion of the reserves we supply in a five-week facility. We stand ready to take further measures in order to keep the overnight rate in line with Bank Rate."

Mr King also stressed that the Bank had increased the liquidity available to the markets by 30 per cent since the start of the credit crunch. He dismissed the notion that the European Central Bank and the US Federal Reserve had been more helpful to their financial systems.

"We've been very successful at doing that: in the last two months marginally more successful than the ECB but more successful than the Fed certainly because the Fed are constrained by laws that prevent them remunerating reserves with the central bank. I don't think there has been a significant difference. All central banks have been injecting liquidity in order to maintain broadly the same amount of liquidity as they were doing before."

The defence of the Bank's reaction to the credit crisis follows a series of criticisms that other central banks have injected much greater sums into the money markets. However, the Bank has pointed out that the UK system operates differently to markets in the US and Europe.

The difficult task facing the Fed was highlighted yesterday when the US growth figures for the fourth quarter were revised up to an annual growth rate of 4.9 per cent, from 3.9 per cent.

The revisions will make it harder for the Fed to loosen monetary policy in the coming months. Cutting interest rates, as some in the Fed have hinted, in an economy with that degree of momentum behind it may be more hazardous than many observers had previously thought.

Rock lending up by 2.7bn in a week

More lending by the Bank of England to Northern Rock suggests that naming Virgin as preferred bidder for the bank has failed to stem retail deposit outflows.

"Other" loans on the Bank of England's balance sheet, released yesterday, increased by 2.7bn, up from 1.1bn the previous week. The rise suggests that the Rock's borrowing has gone past 25bn.

Rebuilding the deposit base is key to Virgin's plan. Sir Richard Branson, Virgin's chairman, has tried to reassure customers that the bank has a viable future.

"By the time the bids are completed, there may not be much of a retail deposit base left," said Simon Ward, chief economist at New Star.