Bank of England Takes Steps To Ease Credit Crisis

By Stewart Douglas

The Bank of England has today announced new measures designed to tackle short term bank liquidity problems caused by the increasing sub-prime sector problem in the US.

The Bank has risen the amount of cash assets that can be held at the central bank for overnight use, in order to relieve pressure on inter-bank lending rates which have been high of late, and have undoubtedly contributed to the overall lending climate.

However, despite the rise, inter-bank lending rates remain high, which is further adding to the liqudity problems faced by lending institutions caught up on the sub-prime crash.

The Bank of England is expected to meet tomorrow to determine interest rate policy, which is widely thought to remain at 5.75% over the next month in order to allow the UK economy to recover from the impact of wider economic factors.

The move allows banks to withdraw funds from the Bank of England at a lower rate, in order to finance short-term liquidity problems, whilst enabling them to borrow over the money they’ll save after today’s move.

It is thought that the move will help liqudity flow more readily through the banking system, just weeks after central banks and governments had taken steps to rectify the liquidity shortage through cash rescue packages.

The sub-prime sector has caused untold worry for financial markets and lending institutions, with rising defaults tying up bank liqudity.  As a result, credit has become less easy to come by for banks and consumer borrowers, which could end up plunging the world economy into recession.

With the Federal Reserve, European Central Bank and Bank of England to consider interest rate policy over the next month, the credit situation could be helped even further by reducing the pressures on variable mortgage repayments.

The Federal Reserve have already hinted towards cutting interest rates at the next available opportunity in order to help out ailing mortgage lenders.