The conflicting statements in full

A euphoric City reaction to an aggressive cut in US interest rates to stem fallout from the global credit crunch was badly soured yesterday as investors were unsettled by the Bank of England Governor’s U-turn over the crisis.

Investors hailed Tuesday’s steep half-point reduction in US rates by the Federal Reserve as a well-judged move to quell credit market turmoil and ward off economic damage.

The FTSE 100 index of Britain’s leading shares soared by 176.7 points, or 2.8 per cent, in its biggest gain for a month, closing at 6,460 as the Square Mile pinned its hopes on US policymakers to calm markets’ upheavals and guarantee growth.

BACKGROUND

• Elephant slumps in wake of crunch

• Heads on the block, investors call for change

• Credit crunch forces Delek to leave property deal

• US rate cut looks certain after new data

• Bank of America to axe 3,000 after 'our errors'

BACKGROUND

• More pain for private equity industry

• Russian state bank poised to boost liquidity

• House prices‘to stay flat for years’

• Will soaring oil pump up inflation?

• US bank slump goes on

Black clouds loom on horizon

For the first time in 15 years, I am seriously worried about the outlook for the economy, the housing market and sterling

Float on the job market

Don't believe the scary headlines. It's not the worst time to consider a career in banking

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But the fizz was taken out of the celebratory mood over the Fed’s boost as Mervyn King’s decision to ease market strains for banks with new injections of funds left the City fretful over the Governor’s abrupt reversal of strategy.

The Bank’s sudden move to curb strains in the market for three-month lending between banks was itself widely welcomed, but senior figures across the banking and investment community were left startled and perplexed by Mr King’s dropping of his previously emphatic insistence that just this action could not be “sensibly entertained” by the Bank.

City jitters were reinforced by the knowledge that the Governor had bluntly insisted that such measures, which he said could reward reckless lenders, would be taken only if those worries were overridden by severe dangers to the economy.

Mr King’s U-turn left a series of senior City figures saying that the Governor had lost the confidence of the Square Mile, with some calling for him to resign over what was seen as a humiliating retreat that raised questions over his judgment.

The Bank has been under pressure from much of the City, as well as the Financial Services Authority, for days to follow the Fed in extending longer-term three-month borrowing facilities in the interbank loans market, and to accept mortgage debt as collateral, just as the American authorities have done.

Yesterday the Bank capitulated to those demands. It said that on Monday that it would hold a £10 billion auction of three-month loans for banks in the first of four such weekly interventions to help to rein back elevated interest rates in the three-month wholesale money markets. The Bank also agreed to accept more varied, lower-quality collateral than is normally demanded.

Yesterday the announcement had an immediate calming effect on three-month “Libor” rates, with these falling back to 6.55 per cent, from 6.75 per cent at Tuesday’s fix.

The Bank’s surprise statement was greeted with incredulity, however, by some key City players.

At least one said that Mr King should step down from the Bank immediately. Another said: “I wouldn’t call for his resignation, but it does pose the question of whether he should serve another term. It seems that the Bank has lost its market radar.”

Fund managers said that the Bank’s move raised concerns about at lurking financial threat. John Hamilton, of Jupiter Asset Management, said: “[It] raises questions as to quite what’s caused them to change tack.”

At Northern Rock, sources said that executives were “absolutely livid” at the Bank’s reversal. They said that the still-embattled lender would not have needed the crisis guarantees given this week by the Treasury to stem a run on its deposits if the Bank had taken the same action earlier, when Mr King refused to do so. “This is what they were asking for for the past month,” the source said.

Bank of England's change of tune

August 9 Global credit squeeze reaches a crisis point and European Central Bank injects €95bn to ease pressures

August 10 US Fed follows suit

August 17 The Fed cuts its primary discount rate by half a percentage point to 5.75 per cent, causing share prices to soar

August 18 Reports say Northern Rock is planning to take advantage of the cheap money being offered by the Fed to help solve its short-term funding crisis

September 12 Mervyn King suggests he will not bail out banks

September 13 A £4.4bn relief fund offered by the Bank is drained by banking giants in less than an hour

September 14 The Bank bails out Northern Rock by providing emergency funding

September 17 Alistair Darling says that the Government will guarantee all deposits held with Northern Rock. Treasury officials say the guarantee will extend to any other bank in difficulty

September 18 The Fed cuts the federal funds rate by half a percentage point to 4.75%

September 19 The Bank says that it will inject £10bn into the longer-term money market

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