Only a week ago, Mervyn King insisted that the Special Liquidity Scheme set up for struggling banks in April would close as planned on October 21. In a stunning U-turn, the Bank of England Governor declared yesterday that the scheme would be extended until January.

Banks have been pressing for just such an extension of the scheme, which allows lenders to swap mortgages for government bonds.

The Bank said that the move reflected the current “disorderly” market conditions. It also represents a victory for Alistair Darling, the Chancellor, who was known to want the facility extended. The Bank’s change of heart will raise hopes that it will also acquiesce in other proposed moves for supporting the mortgage market, in spite of Mr King’s doubts that they would do any good.

The facility was designed to ease the pressure on funding due to the sharp contraction in lending between banks.

Yesterday that lending came to a virtual halt as nervous banks hoarded cash.

Several measures of financial stress reached record levels. One of the many factors spooking the markets was the news on Tuesday night that a big US money-market fund had seen its net asset value fall below $1 a share because of losses on Lehman debt. This sparked concern of mass withdrawals from the funds, which are key providers of liquidity to the financial system.

Against this background, the Bank of England’s U-turn is welcome. But it gives the unfortunate impression that once again the Bank is on the back foot.

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