BoE offers reserves of £4.4bn

by Gill Montia

Story link: BoE offers reserves of £4.4bn

The Bank of England (BoE) has promised to provide up to £4.4 billion in addition reserves, against which institutions can borrow at the current base rate of 5.75%.

The bank has remained silent over the pressures on the money markets for four weeks but its actions yesterday brought about a reduction in interest rates between lenders.

Some city analysts were disappointed that further action was not taken to ease the three-month London Interbank Offered Rate (LIBOR).

LIBOR is the rate charged by one bank to another for lending money. Three-month Libor is at its highest level since 1998 and medium-term lending is in short supply.

In its statement the BoE said that the liquidity problems of three-month LIBOR were not an issue it could solve.

It believes these problems are caused by uncertainty surrounding the value of assets held by the banks.

The increased cost of wholesale borrowing is continuing to put pressure on retail lenders and the demand for medium-term cash is expected to increase next week, as certain commercial papers mature.

Commercial papers are money market securities issued by large banks and corporations.

According to Lehman Brothers, approximately $113 billion of euro commercial paper is due to be refinanced in the next two weeks, compared with $100 billion in mid-August.