LONDON—The Bank of England's emergency offer of 5 billion pounds of 3-day loans was nearly five times oversubscribed on Monday as financial institutions scrambled for cash in the face of a global credit crunch.
Aimed at restoring confidence to panicky markets in the wake of the weekend firesale of U.S. investment bank Bear Stearns, the loan offer was only the second such "exceptional" operation since the crisis began last summer.
But investors were scared things would get worse and sold the pound and stocks aggressively. Sterling's trade-weighted index hit its lowest level since March 1997 and the FTSE 100 index of leading shares fell nearly 4 percent.
The BoE said it wanted to bring overnight interest rates down. Banks were so fearful of each others' solvency on Monday they were charging more than 25 basis points above the main central bank lending rate for loans of even just one day.
"Given the money market conditions this morning, the situation is very serious and represents a new and unwanted twist to the credit squeeze," said Philip Shaw, chief economist at Investec. "Five billion pounds represents a substantial sum."
The last time the central bank took such a step was in September just after the run on Northern Rock bank, Britain's fifth-biggest mortgage lender, which was later nationalised.
Panic Everywhere
The BoE said that like other central banks it was keeping a close eye on developments. On Tuesday, it is offering 10 billion pounds worth of three-month loans in coordinated global action to restore confidence to jittery markets.
Prime Minister Gordon Brown's spokesman said the BoE and Treasury had been in close contact with their counterparts in the United States, but Germany said there were no plans for any special meeting of the Group of Seven at the moment.
The U.S. Federal Reserve cut its discount rate by a quarter-point late on Sunday to 3.25 percent and allowed the 20 primary dealers in U.S. Treasuries to use its window in a bid to calm market jitters. But the move ended up smacking of panic.
Stock markets around the world started sliding first thing on Monday and interbank lending rates surged. The dollar fell to record lows against the euro but sterling was harder hit as investors bet Britain's huge financial sector made it particularly vulnerable to any meltdown.
"People are increasingly looking at what is happening in the U.S. and thinking it could happen over here," said Jonathan Loynes at Capital Economics.
The pound's trade-weighted index was down nearly 2 percent on the day at 93.4. The last time it was lower was in March 1997, according to analysts.
While that would have an upward effect on inflation, particularly as commodity prices keep rocketing, markets are now betting the BoE will cut interest rates again soon.
"The Monetary Policy Committee will cut policy rates at the first available opportunity in a fire fighting exercise to prevent a dangerous downward spiral in asset prices, especially with the UK banking sector also under stress," said Amit Kara, economist at UBS.
"If this implies taking the eye off inflation expectations temporarily, so be it."
The BoE has cut interest rates twice since the credit crisis began last August but short sterling rate futures leapt on Monday to price in at least 100 basis points of cuts before the end of the year. Investors are betting U.S. interest rates will be cut by that amount this week.
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