Bank of England lends £10bn to ease credit woes

In a bid to ease the effects of the credit crunch and high borrowing costs, the Bank of England has lent £10 billion to financial institutions and banks. Different borrowers bid for the cash in an auction.

Those who bid at the minimum rate of 5.36% received 75% of the amount they requested. The total amount of money bid was £850 million over the £10 billion promised by the Bank.

The average interest rate of bids was 5.949%, with the highest rate reaching 6.6%. Under the rules of the auction the money can only be borrowed for three months.

John Wraith, head of UK interest rate strategy at Royal Bank of Scotland said, The rate was low and demand was relatively low which suggests that pressures might not be as intense as we perhaps might have thought, reports the BBC.

Wraith continued Someone borrowed money at 6.6% and that definitely suggests that they were desperate to get some funding, reports the BBC.

Wraith also suggested that there could be low demand for the funding because a number of UK financial institutions may have tried to get cheap funding from the European Central Bank (ECB).

The ECB has given an allocation of 348.67 billion euros to banks at a below market rate of 4.21% and has said that more money would become available if necessary.

The central banks have made sure they'll be no year-end problems in money markets, but it doesn't mean there won't be problems in the New Year,

Following the auction the London Inter-bank Offered Rate (Libor rate) which is the rate at which banks lend to one another, dropped from 6.627% on Wednesday to 6.386% today.

Last Wednesday the Bank of England together with four other central banks announced its plan to lend money to ease the problems caused by the credit crunch.

The governor of the Bank of England, Mervyn King, told the Treasury Select Committee, A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets, reports the BBC.

It is hoped that the auction of £10 billion by the Bank will cut rising lending costs between retail and commercial banks. Lending costs have remained high despite the cutting of interest rates in both Britain and the USA.

The other central banks who have loaned money to ease the credit crunch are the ECB, the US Federal Reserve who offered $20 billion and the central banks of Canada and Switzerland.

Despite this the US Treasury Secretary Henry Paulson has said that there is no silver bullet to cure the ills caused by the credit crunch.