Signs that the huge interventions made by the world's central banks in the financial markets may be having some impact emerged yesterday, as market interest rates eased perceptibly. Sentiment was improved by the brightening prospects for the Paulson Plan and Lloyds TSB's purchase of HBOS.
Government guarantees to depositors in a number of countries served to further reassure markets.
Yesterday the Bank of England announced an additional $30bn (£17bn) injection of liquidity on a one-week basis, on top of the $40bn injected since last Friday. So far around £300bn-worth of pounds and dollars are being pumped into the system via these initiatives, the Special Liquidity Scheme and the Bank's normal open market operations.
Overnight interbank rates eased back from yesterday's highs following the latest efforts by the world's central banks. The overnight sterling inter-bank rate fell back sharply by almost 2 per cent to 4.96 per cent – below the Bank's official 5 per cent base rate – while dollar and euro borrowing costs were also lower. The overnight dollar LIBOR rate improved from the crisis level of 6.875 per cent to 3.79 per cent.
However the three-month interbank rate crept higher again with banks still reluctant to lend to each other for longer terms. An increasing body of opinion among economists and bank analysts sees the poor capital position of the financial system as the fundamental cause of the freeze in money markets.
The Bank said it was continuing "to monitor money market conditions closely". Economists increasingly expect a cut in rates when the Monetary Policy Committee meets next week.