The European Central Bank and Bank of England flooded money markets with funds today as the UK central bank chief warned of a possible "self-reinforcing" downward spiral in credit.
The Bank of England (BoE) charged a minimum bid rate of 5.36 per cent for its offer of £10 billion sterling of 3-month money, as part of a coordinated action with other central banks to ease market tensions by offering cash at favourable rates.
The money was taken up though demand was muted. Previous similar auctions had failed as the BoE had set a minimum rate way above the main lending rate and no bank wanted to be seen as desperate for cash.
"In the last four weeks, banks themselves have been worried that the impact of their reluctance to lend will lead to a sharper slowdown in the United States," Bank of England Governor Mervyn King told a parliamentary committee.
"That concern is a serious one because it does hold out the prospect that there will be a self-reinforcing downturn in credit and activity."
The ECB scrapped the usual upper limit on how much it lends to banks in Tuesday's refinancing operation, offering two-week money to ensure lending rates stayed close to its target of 4 per cent.
Banks clambered in, bidding for a hefty €348.6 billion ($500 billion) at a 4.21 per cent lowest rate. Two-week Euribor interbank rates fixed sharply lower in response.
The offer was the first time the ECB has said it would meet all banks' refinancing bids above a certain rate since its first liquidity injection on August 9th, as the credit crunch blew up.
"They're throwing everything they can at the liquidity problem," said one trader.
On Monday, the ECB offered $20 billion of 28-day funds at auction as part of the joint plan by leading central banks to alleviate strains in the interbank lending market.
The Federal Reserve offered a similar amount, while the Swiss National Bank (SNB) offered up to $4 billion at a discount to the Fed's existing discount rate.
Results of those auctions are due tomorrow.