Banks take Old Lady's money

The Bank accepted bids above 5.36% for three-month funds, 14 basis points below bank rate, a move which signalled a desire to get interbank rates nearer policy rate levels. The result was that the Bank allocated all £10 billion-worth ($20 billion) of three-month money, charging an average borrowing cost of 5.95%, 45 basis point above bank rate.

But, while all the money was taken, the cover ratio was just 1.09, indicating the auction was far from oversubscribed.

The results of the latest tender are in sharp contrast to the Bank's attempt to offer additional three-month loans in late September, when no bids were received.

The tender in September set the minimum borrowing rate at 6.75%, which was then one percentage point above the Bank's benchmark rate. George Buckley, the chief economist at Deutsche Bank, said then that "a combination of the high rate along with potential concerns about a witch-hunt and some evidence of an easing in money market conditions seems to have put banks off."

Three-month sterling interbank borrowing costs, along with those for euros and dollars, have risen over recent weeks. The joint action by central banks last week looked to lower borrowing costs. However, Mervyn King, the governor of the Bank, said on Tuesday that interbank rates would remain above normal levels until assets that investors have avoided since August are adequately re-priced.

"The most important step is that the private sector, and it is only the private sector that can do this, begins to restructure and re-price those products that people are unwilling to buy," King said. "At that point, and at that point only, will you see Libor [London interbank offered rates - a measure of average interbank borrowing costs] spreads return to normal."

To read the results of the tender, click here