The market's continuing demand for Bank of England funding was not met yesterday. In fact, banks got about one-third of what they asked for
Britain's banks were left short-changed again yesterday after the Bank of England made only £13.6bn available for them to borrow -- nearly three times less than they wanted.
The figures released yesterday for the Bank's weekly open market auction mirror those of a week ago when banks sought more than £30bn and received just under £11bn.
The continuing demand for Bank of England funds came as figures showed that the credit crunch is getting worse again with the three-month London inter-bank lending rate moving above 6 per cent. That compares with the Bank of England base rate of 5.25 per cent.
The Bank yesterday tried to play down the market's hunger for funds, saying it was not untypical for the auction to be heavily oversubscribed even before the crunch. But Philip Shaw, an economist with Investec, said yesterday that the figures were evidence of the hunger among banks for central bank funds, which they have been unable to secure from each other.
He also said that in a more normal situation he would expect the Libor rate to stand at about 5.2 per cent: "You would expect it to be a little lower than base rates because they are expected to fall over the next few months... Against that background, the demand for funds from the Bank should come as no surprise."
The Libor rate has reached its highest level since December, underlying the reluctance banks have to lend to each other, which has been gumming up the financial system since the credit crunch started to bite in August.
The Bank's Governor, Mervyn King, told MPs on the Treasury Select Committee that he and his staff were looking at a "long-term solution" to the credit markets' continuing problems.
But British banks have continued privately to voice frustration with what they perceive as the Bank's reluctance to act compared to the European Central Bank and the US Federal Reserve, which have been pumping funds into the financial system to improve liquidity.
The Bank is coming under pressure to cut interest rates again, despite evidence that inflationary pressures in Britain's economy remain considerable.
One banking industry source said: "If you look at the losses as a result of the credit crunch, British banks have done much better than their peers in the US and in Europe. And yet we are being disadvantaged because their central banks have been prepared to inject liquidity into the market while our central bank has not." He added: "This doesn't just affect us, it affects the man on the street too, because the lack of liquidity means there are less mortgages and loans for companies available. Those that are out there are also more expensive."