BoE says no one wanted 3-month loan

By Staff
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LONDON, Sep 26 (Reuters) Not one institution took up the Bank of England's offer of a 3-month loan on Wednesday in a sign credit conditions are easing and because the money only came at a punishing interest rate.

Banks were put off by the BoE charging a minimum interest rate of 6.75 percent, nearly half a point above the current interbank lending rate.

Analysts speculated morever that banks feared paying over the odds for BoE cash could be taken as a sign they were completely strapped and might precipitate the kind of crisis that engulfed Northern Rock this month -- the mortgage lender suffered Britain's first bank run in a century this month.

''We had thought that the illiquidity in the markets would encourage some financial institutions to take this money, even at penal rates,'' said George Buckley, chief UK economist at Deutsche Bank.

''But a combination of the high rate along with concerns about a witch-hunt and some evidence of an easing in money market conditions seems to have put banks off this auction.'' The FTSE-100 index of leading shares, the pound, and interest rate futures all rallied after news that no one was so desperate for money they had to go to the BoE for cash.

''What it tells you is on the whole the market seems to have enough liquidity, at least at that price, which is on balance reassuring,'' said Laurence Mutkin, strategist at Morgan Stanley.

The BoE said it would still hold further three-month auctions over the next three weeks as planned.

''The auction was designed as a safety valve in light of concerns that arose about potential pressures in the banking system more generally as a result of Northern Rock,'' a BoE spokesman said.

''Since the announcement there has been a significant fall in 3-month interbank rates which made the auction look expensive.'' The BoE announced last week it would hold these auctions in a bid to ease interbank interest rates which were much higher then. But the move was seen as a U-turn because Governor Mervyn King had previously said it was not the central bank's job to ease three-month rates as that could encourage further risky behaviour.

Explaining the decision on Thursday, King said he changed his mind because of Northern Rock -- there was a risk to the banking system as a whole.

''Mr King, who came under pressure last week for not providing term liquidity earlier, may well feel vindicated for his defence of the BoE strategy,'' said Deutsche's Buckley.

REUTERS SR RN1921

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