Bank of England pumps £5bn more into money markets

The Bank of England has announced a £5bn increase in the supply of three-month loans it will offer to the banking system this month and promised further action to deal with the credit crunch.

Banks will be able to bid for £15bn of the key loans next Tuesday. The Bank of England made £10bn available in December, January and March as part of co-ordinated international action by central banks to increase liquidity in the financial system.

The rate for three-month sterling Libor, the rate at which banks lend to each other, fell to 5.93 per cent yesterday from 5.9475 per cent the day before. But the cost of borrowing is still severely detached from the Bank of England's 5.25 per cent base rate, which is expected to fall as early as this week.

Mervyn King, the Bank's Governor, was reluctant to let banks have extra three-month money early in the financial crisis, but has come under increased pressure to do so as the turmoil has carried on and threatened the wider economy.

In announcing next week's auction, the Bank promised "further measures in due course following discussions with interested parties". Lenders have been pressing the Bank to take a broader range of collateral and to make other changes to its money-market operations to bolster the financial system. Next week's auction will accept the same collateral as the previous three.

Mr King has been discussing potential remedies with the banks, but has insisted that risk must remain with the lenders' shareholders and that a solution must deal with the backlog of assets on balance sheets rather than subsidise new loans.

"The Bank is committed to providing the liquidity assistance that the system as a whole needs to function normally," it added yesterday. The Bank's Monetary Policy Committee meets today and tomorrow to decide interest rate policy, and some market observers hope the new liquidity measures will be announced to coincide with the meeting.

Simon Ward, chief economist at New Star Asset Management, said the money market operations were now more important than the rate decision.

"The form and scope of such measures should be discussed and decided upon by the full MPC, not a select group of Bank officials. To emphasise its increased focus on market rates, the MPC could communicate its plans for narrowing Libor/Bank rate spreads along with its rate decision at midday on Thursday," Mr Ward said.

Other major central banks are putting money into the system this week. The European Central Bank lent eurozone banks $15bn (£7.5bn) in 28-day funds yesterday, although banks bid for more than double that amount.