Funds injected in surprise U-turn

20 September 2007

The Bank of England has offered to inject $14 billion in money markets in an effort to stabilise the economy.

The move comes as a shock after the bank previously stated it could not and would not do anything to bring down the sky-high interest rates in the three-month interbank lending market.

But the central bank said: "This measure is being taken in order to alleviate the strains in longer-maturity money markets."

Following the bank's move yesterday (Wednesday) Libor rates dropped to 6.55 per cent, down from 6.75 per cent.

Banks will be able to offer a wider range of collateral than is normally allowed, including their mortgage debt, said the Guardian.

The move prompted an increase in confidence in the UK economy, the Sterling pushing to the two dollar level.

Speaking to the newspaper, Philip Shaw, chief economist at Investec, said: "Clearly, the problems surrounding Northern Rock have added to pressure on the Bank to normalise money markets."

Despite the cash injection the money markets remain volatile.

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