The Bank of England broke its silence on the credit crisis yesterday by reassuring markets that banks could borrow from its unlimited credit facility if they need to increase liquidity.
The bank reminded traders that it is ready to provide theoretically unlimited levels of liquidity, but not, as the European Central Bank has done, at the same price as its ordinary lending rate of 5.75%.
Despite tightening credit conditions, no banks have yet made use of the Bank of England’s credit facility since mid-July. The Bank charges financial institutions one percentage point above the Bank Rate to access its facility, as part of a system for operating in the money markets introduced last year.
The framework does allow for the Bank to inject liquidity at the base rate if it believes it necessary. But the Bank is anxious not to be seen as the first port of call when liquidity dries up.