The Bank of England, plus four other powerful world banks are to inject £53.7billion into international money markets in an attempt to ease the affect of the global credit crunch.
The Bank of England, the US Federal Reserve, the European Central Bank and their equivalents in Canada and Switzerland have joined forces to try and make lending between banks easier in order to avoid another crisis like Northern Rock.
Northern Rock got into trouble earlier this year due to the way it borrows cash from other banks in order to provide mortgages to its customers. The current economic climate – fuelled by the subprime crisis in the US – caused banks to start hoarding their cash rather than lending it, so Northern Rock could not borrow the cash it needed and had to turn to the Bank of England for an emergency loan – in total, the fledging Newcastle-based bank is thought to have borrowed almost £30 billion.
This initiative, which will see more than £50billion injected into the global economy, is designed to stop the same thing happening again. The Bank of England is to announce its offer to the fund tomorrow, but it is thought to be around £11.35billion. Of the total injection, it is believed that almost half - £22.7billion – will go to the UK.
The British Bankers' Association called the move "a constructive and imaginative initiative which should help to address the markets’ short term borrowing needs."
"It is also importantly an international solution to an international issue," it said in a statement, "a recognition that all major economies are feeling the effects of the credit crunch and that together they can help to address them." But Royal London Asset Management are not so sure, saying that although the measures will ease pressures, a cash injection is not enough to solve the bigger issue.
“This news just goes to illustrate again how serious the illiquidity issue in money markets has become," said Ian Kernohan, Economist at RLAM. "For monetary policy to work, it is important that changes in Bank Rate are passed on to money market rates and this just wasn’t happening.
"If it works, and it’s too early to tell at the moment, this action reduces some of the downside risks to growth in 2008," says Mr Kernohan. "But it doesn’t change my view that the UK economy will slow appreciably or that interest rates will be cut again early next year.”
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