While the Bank of England has its worries going into next week's interest rate decision, the almost simultaneous judgement on rates by the Governing Council of the European Central bank is set against a still more distressed background.
Yesterday, European financial centres witnessed more turmoil, as banks continued to struggle for cash on wholesale lending markets, hampered by last-minute accounting on the final day of a torrid third quarter and dampening any hopes of a quick end to the credit crunch.
Despite the ECB's efforts to inject billions of euros in liquidity, benchmark eurozone lending rates rose to six-year highs and three-month interbank offered rates were fixed at 4.79 per cent – the highest since 2001 and almost 80 basis points above the ECB's key interest rate. By contrast the UK equivalent, Libor, is about 55 basis points above the base rate, having peaked at almost 120 points higher than the official lending rate on 11 September.
Although the ECB said the amount of cash eurozone banks sought to borrow from it at penalty rates slowed to a trickle on Thursday, from three-year highs of almost €4bn (£2.8bn) the previous day, jitters persisted about a repeat of the problems faced by Northern Rock, with analysts suggesting the stricken lender may have borrowed a further £5bn from the Bank in the past week – taking borrowing from the emergency facility to almost £8bn in a fortnight. A number of smaller German banks have fallen victim to exposure to the US sub-prime mortgage market.
Meanwhile, according to BNP Paribas, the headline index for business confidence in the eurozone's service sector "fell off a cliff" in September, showing the biggest one-month fall ever.Reuse content