City banks beg King for £71bn loans

BANKS desperate for cash besieged the Bank of England yesterday, bidding more than four times the amount of money on offer in its weekly auction — their highest cry for cash in almost six months.

The rush for money — with banks bidding for £71.5bn compared to the £15.3bn the Bank made available — came as its Monetary Policy Committee decided to leave interest rates on hold as inflationary fears trumped concerns about the slowing economy.

“[The banks’ cash plea] is yet another indication that things are still far from normal with conditions not the way they should be, or the way we expect them to be,” said Paul Dales, economist at research house Capital Economics.

The dash for cash was thought to be sparked by the fact that interbank lending rates — a key indication of banks’ willingness to lend to each another — are still high, meaning the Bank’s weekly auction was a cheaper way for firms to borrow money.

Interbank rates have been inching down over the past week — with the three-month Libor rate falling yesterday to 5.78 per cent — but they are still well above the main 5 per cent UK interest rate. Last month, the Bank launched a £50bn “special liquidity scheme” allowing banks to swap mortgage assets in exchange for government bonds that can then be used to raise collateral.

However, Mervyn King, the Bank’s governor, recently admitted the liquidity scheme was not designed to help banks and mortgage companies to return to their pre-crunch positions. “We’re not doing this because we have an interest in the financial position of the banks as such, but their ability to finance growth in the rest of the economy,” he said.

The decision to leave rates at 5 per cent was widely expected as the Bank, which cut rates by 25 basis points in April, is typically not keen to raise hopes of a more rapid easing in monetary policy by carrying out back-to-back rate cuts.

BY KATIE HOPE