Read the full verdicts and predictions of The Times shadow MPC ahead of today's decision

The Bank of England broke its four-week silence over the worsening liquidity crisis yesterday as it pledged for the first time to inject funds into the banking system.

Overnight interest rates between lenders fell as the Bank used its first public statement since the financial storm broke to promise to provide up to £4.4 billion of additional reserves this month against which institutions could borrow at the base rate, currently 5.75 per cent.

But the tentative measure left some in the City disappointed, as the central bank bluntly ruled out trying to correct the seizure in benchmark three-month Libor interbank rates.

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The Bank said the liquidity problems of three-month Libor were not an issue it could solve, as they were caused by the uncertainty surrounding the value of assets held by the banks. It said: “The source of these problems does not, therefore, lie in a lack of central bank liquidity.”

The Bank has come under pressure to bring down three-month Libor, now at its highest level since late 1998. The benchmark borrowing rate, which hit a fresh nine-year high of 6.8 per cent yesterday, is more than 100 basis points over the Bank of England base rate, the widest gap in 20 years.

Elevated wholesale borrowing costs are beginning to affect the retail market. Northern Rock was among lenders that yesterday increased some fixed-term savings rates by as much as 55 basis points. Demand for three-month cash is expected to worsen next week as outstanding commercial papers mature. Lehman Brothers said that about $113 billion of euro commercial paper was due to be refinanced in the next two weeks, compared with a $100 billion sum that matured in mid-August.

Some senior figures have described the Bank’s low-key approach to the money market turmoil as “Victorian”, while Bob Diamond, president of Barclays, has issued a public plea for more short-term liquidity.

However, others said that even the Bank’s limited moves were a step too far. Sir Steve Robson, former Second Permanent Secretary at the Treasury and a member of the Times MPC, said that the Bank had set its “pain threshold” for action too low, given the scale of reckless lending that underlay the crisis. “

This raises real moral hazard issues,” he said. “If the markets are not allowed to punish poor practice, the obvious alternative response is more intrusive regulation to stop such practice ever happening. This would carry a high cost to the economy.”

The Times MPC voted unanimously to keep interest rates on hold yesterday. The Bank’s Monetary Policy Committee is widely expected to do likewise today and peg rates at 5.75 per cent.

Despite the Bank’s intervention, the concerns surrounding the money market spooked equity investors and the FTSE 100 dropped 106.1 points, or 1.7 per cent, to close at 6,270.7. The Dow Jones industrial average closed down 143.40 points at 13,305.50.

Meanwhile, the European Central Bank gave warning that volatility had risen. “Should this persist tomorrow [Thursday], the ECB stands ready to contribute to orderly conditions in the euro money market,” it said.

The ECB will also set official interest rates for the eurozone at its meeting today, as expectations of a quarter-point increase to 4.25 per cent fade.

Julian Jessop, of Capital Economics, said: “This signal alone has already been enough to push eurozone overnight rates sharply lower. It has also surely killed off any lingering possibility that the ECB might hike official interest rates [today].”

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