Bank of England plans cash injection move to ensure liquidity

The Bank of England today stepped in to offer extra money to the banking system because of "exceptional stresses in financial markets".

It said that, despite there being no shortage of liquidity in the short-term sterling market at the moment, it was introducing a new facility to offer such liquidity "against the widest range of collateral". This should make it easier for banks to obtain short-term loans in the money markets.

The move comes a week after six central banks including the Bank of England acted together to make it easier and cheaper to borrow dollars.

The move came as the Bank of England's Financial Policy Committee said the outlook for UK bank profits has deteriorated in the last two months, making it harder for them to raise extra capital.

The influential committee backed recent calls from the Governor, Sir Mervyn King, for banks to look at cutting both dividends and bonuses to preserve high levels of safety capital.

The committee's report on its meeting last month said: "While UK banks had met most of their term wholesale funding targets for 2011 earlier in the year, progress in building funding resilience had been set back in recent months."

It warned that if banks continued to find it difficult to borrow medium-term funds there would be renewed pressure on lending to companies and individuals.