Sterling suffers as Bank of England unveils rescue package
LONDON (AFP) — The Bank of England's 50 billion lifeline to the beleaguered banking sector -- in the latest bid to combat the global credit crisis -- was met with an unenthusuastic response by the currency markets on Monday.
Sterling was under heavy pressure after the BoE announced it would try to ease the scarcity of credit but markets are still examining the potential impact of the rescue package.
"While the scheme may increase liquidity into the system, it will only indirectly reduce the cost of funding if banks make frequent use of this facility," according to BNP Paribas.
The brokerage predicted that the cost of lending via this theme will shadow the interbank rate with only marginal difference.
"If banks use this facility, liquidity spreads will ultimately come down due the additional liquidity in the system, but there will be no immediate relief for the stressed mortgage market, explaining the negative reaction of sterling," they added.
UBS analysts also said the pound tumbled on market disappointment with the plan.
"It is probably too early to judge whether the BoE plan will be a success. It is clear, however, that the UK central bank is trying to avoid the Fed's mistakes at its first TSLF auction," they added.
They added that high costs and barriers will likely make sure only those with genuine funding issues will have access to the facility and maintained their bearish stance on the pound.
Some believe the BoE will have to up its offer up to 100 billion pounds before there is any significant impact on the wider economy.
The reaction on the interbank market where banks lend to each other was also muted with the LIBOR rates at key maturities all staying hardly changed from last week and well above the current 5.00 percent benchmark BoE rate.
