Friday September 26, 2008, 3:10 am
The Bank of England moved on Friday to inject longer term cash into money markets as part of a co-ordinated effort with the US Federal Reserve, the European Central Bank and the Swiss National Bank.

The intervention follows the breakdown late on Thursday of talks over a $700bn bailout for the US financial system.

Money market traders said that interbank lending for terms longer than a day had come to a near standstill as counterparties feared that they may be lending to a bank that could suddenly become insolvent.

The Bank of England said it would extend $30bn in cash for a week against eligible collateral, drawing on currency swap lines put in place earlier this month with the Fed.

”These operations are intended to address funding pressures over quarter-end,” the Bank said.

The Bank will also make $10bn available for overnight borrowing. It had previously agreed to provide $40bn daily in overnight money last week, but so far, there has not been demand for the full amount.

Moreover, the Bank said it will inject longer term money into the sterling markets, as banks had been pressing it to do. It said it will extend its long-term repurchase operations against extended collateral, including mortgages. As of September 29, it will offer £40bn for maturity on January 15, taking banks through the year end when cash is generally hoarded by banks.

Bankers welcomed the move. Stuart Gulliver, chief executive of Global Banking and Markets at HSBC, said: ”It’s what the market was looking for. It shows a willingness to listen and will alleviate stresses in the UK bank system right through year-end.”

Money market rates have been distorted as banks parked money overnight, with overnight funds rates far below the Bank of England’s 5.0 per cent rate. However, as of Thursday, money borrowed for three months on an unsecured basis was trading at a crisis high of about 1.5 percentage points above the three-month forward overnight rate, known as SONIA.

The Bank said it would continue to drain reserves from the short term money markets to help keep those rates in line with its Bank Rate.

In addition, it said it and other central banks will continue to work closely and ”are prepared to take further steps as needed to address the ongoing pressures in funding markets.”

Additional reporting by Peter Thal Larsen