If you make successive U-turns, you don’t end up getting anywhere.
The Bank of England has made another abrupt about-turn in its handling of the squeeze in credit markets, offering to inject £10bn into money markets to bring three-month interest rates down – and saying it will widen the range of collateral against which it will lend.
Just this morning, Lex wrote:
Even if it had more inclination, the Bank’s ability to lower interbank rates seems slight – interventions by the Fed and European Central Bank have had limited impact.
Inclination no longer a problem, the Bank has apparently decided to have a go regardless. It has previously stressed, in its efforts to bring down the overnight rate, that it was not (repeat not) targeting three-month libor. The widening in the spread between interbank rates and the central bank’s policy rates reflected the difficulty in valuing risk and not a lack of liquidity, it said – and won praise for its stance.
That praise will vanish as quickly as the Bank’s resolve on the matter apparently has. And Mervyn King, the Bank’s govenor, has guaranteed himself an even rougher ride in front of the Treasury Committee on Thursday. His credibility – already under scrutiny – is now looking a tad stretched.
In extending to other banks the offer made to Northern Rock, namely using lower quality collateral in return for whiter-than-white central bank money, the morals of this story have become even more hazardous.
One analyst at SempraMetals commented that the move:
represents a huge climbdown for the Bank of England — which had previously refused to follow the ECB and the Federal Reserve extend generalised liquidity against a wider range of collateral, and implicitly criticised them for fuelling “moral hazard” through such generalised operations and laxer lending standards. The depth of the banking crisis (highlighted by last week’s failure and bail out of the Northern Rock mortgage bank) has left the central bank with little choice. It clearly concluded this was the least-worst option.