Bank of England and ECB act to boost markets

The Bank of England (BOE) and the European Central Bank (ECB) both left interest rates unchanged, but eased liquidity supply as the credit squeeze continued today.

While the BOE rate remained at 5.75%, the bank warned "it is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households". It listed credit spreads and volumes in particular as keys to its forecasts for inflation, which in turn will determine future rate changes. Inflation is expected to remain "around or a little below the 2% target for the next few months", said the bank.

The BOE also increased the available borrowing reserves from £16.56 billion to £17.63 billion in an attempt to bring the interbank rate closer to the base rate. The three-month London interbank rate, Libor, rose to 6.8% yesterday, the highest in eight years. The bank said it could raise reserves by a further 25% to a total of £22 billion if rates did not fall. One market observer yesterday blamed widespread uncertainty for the high rates. "From the high Libor we can conclude that the market is worried about more bank problems," he said, adding that high rates did not represent a shortage of liquidity so much as a perceived need for deeper capital reserves, and a fear of counterparty risk.

Meanwhile, the ECB boosted liquidity by introducing €42.1 billion in three-month loans to the market today, although it kept interest rates at 4%. ECB vice-president Lucas Papademos said price risks remained on the upside and economic fundamentals were strong. ECB president Jean-Claude Trichet said the bank lacked the data it needed to draw "further conclusions on monetary policy".

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