Gold News

Bank of England deepens liquidity bail-out fears

Stock markets are this week celebrating the 0.5 per cent fed rate cut, but experts on both sides of the Atlantic fear the longer term effects of central bank action.

The Fed's generous reduction of interest rates was closely followed by news that the Bank of England was planning to inject liquidity into British banking systems.

In order to achieve this, the central bank has announced a series of planned auctions, where funds will be snapped up by cash-lacking commercial banks in exchange for assets like 'mortgage collateral'.

Announcing a first auction of £10 billion ($20.1 billion) the central bank's action has been perceived as a u-turn, with Bank of England governer Mervyn King last month claiming that such liquidity provision could undermine effective risk pricing.

This week the bank clearly changed tack, claiming that "this measure is being taken in order to alleviate the strains in the longer-maturity money markets".

Such a turn-around is likely to have been influenced by the plight of high-street bank Northern Rock, whose appeal to the central bank's credit facility sparked a recall of funds from worried savers.

With the Fed apparently showing equal readiness to stimulate liquidity with a larger than expected rate cut, global investors may be buoyed in the short term but worried about the effect of Transatlantic credit strategies on inflation.

Those looking to buy gold, however, will be encouraged by the precious metal's price jump in response to the Fed rate cut, with the risks of inflation and a weaker dollar making gold an ever more attractive investment.


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