Global credit turmoil piles pressure on central banks

Investors around the world were this morning bracing themselves for further falls on global stock markets, as the uncertainty continued over the scale of the US sub-prime mortgage crisis and the extent to which the rest of the financial system has been caught up in the problems.

Inter-bank interest rates shot upin London on Friday evening, as they had done the previous night, prompting the following day's collapse in confidence. While the US stock market rallied in late trading on Friday, many investors were yesterday predicting sharp falls this morning in Far Eastern stock markets, which could trigger a downbeat reaction on western bourses.

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Renewed turmoil on global markets would increase pressure on central bankers to provide further funding to ease liquidity difficulties in the financial system. In particular, if the London stock market opens sharply down this morning, the Bank of England will face calls to intervene directly in the crisis.

Last week, Mervyn King, the Bank's Governor surprised some by refusing to follow the lead of other central banks. While the European Central Bank and the Federal Reserve both pumped money into the system, the Bank of England did not, and made no public comment on the crisis.

While Mr King may have been seeking to reassure investors by adopting a relaxed attitude to what could yet prove to be short-term volatility - he also said last week that the credit turmoil might be positive news if it persuaded investors to take a more realistic view of risk - the lack of intervention raised eyebrows.

"For the time being, the Bank of England is being relatively sanguine," said Tom Vosa at NAB Capital. "They are telling banks if they want to get liquidity they can use the usual channels."

Mr Vosa added: "It's a bit of a risk. They haven't said anything yet. The Bank of Canada, the Fed, the ECB - they've all been out to say we are going to provide liquidity wherever, whenever."

Jason Simpson, at ABN Amro, said: "If all the central banks are united and say this is not going to get out of hand, people will have confidence, but I'm surprised they haven't got someone to say we are keeping an eye on this and will provide liquidity if we feel the market needs it."

Mr King's US counterpart, Ben Bernanke, the Federal Reserve chairman, will also face additional pressure if the crisis worsens. While Mr Bernanke did authorise the release of "lender of last resort" funding from the Fed on Friday, he has faced criticism for not acting more aggressively. Many US investors have called for the Fed to bail out the sub-prime lenders worst affected by the spiralling number of people unable to keep up with repayments on their loans, or to provide funding that would compensate banks hit by the widescale frauds prevalent at this end of the mortgage market.

The Fed had an opportunity last week to signal that it was prepared to take a less hawkish stance on interest rates when it announced its latest move on the cost of lending. But not only did Mr Bernanke reject the idea of lowering base rates, his statement gave no hint that any change of policy was likely.

Central bankers will have to decide how interventionist they should be if the sub-prime crisis pushes more financial services companies towards bankruptcy.

The UK stock market has lost all of the gains it has mounted since the beginning of the year.