Europe’s central bank crossed the Rubicon of monetary policy last night as it announced that it would undercut the credit squeeze by lending funds below market interest rates.

The news came as it emerged that Mervyn King, the Bank’s Governor wants to be reappointed for a second term despite the criticisms he has endured in recent weeks over the handling of the Northern Rock debacle.

It also coincided with reports that the Newcastle bank could be divided up between Britain’s high street banks, should a buyer not be found.

In what could be a sign that the unprecedented joint intervention by the world’s top central banks this week has failed to free up lending, the European Central Bank (ECB) announced that it would offer unlimited two-week funds today at 4.21 per cent. The figure is far below the rate of 4.9 per cent that banks were charging to each other yesterday.

The move suggests that the ECB remains exasperated that the market is still under pressure.

Four months ago, the ECB was the first to try to bring overnight rates in line with the base rate, currently 4 per cent in the eurozone, by injecting billions of euros into the market. But this is the first time that the ECB has tackled two-week lending.

The ECB said only that its move was “fully consistent” with its aim of keeping rates close to 4 per cent.

The development also throws the spotlight back on the Bank of England, which has been slow to loosen its lending rules since the crisis began.

The Bank will today auction £11.35 billion of funds against a wider than usual range of collateral in an attempt to ease liquidity woes, but the ECB’s new move raises the bar yet again for what central banks are willing to accept and will spark pressure on the Bank to follow suit.

Mervyn King, the Bank’s Governor, who out of all the world’s top central bankers has been the most reluctant to bail out the banking sector, will today face his critics at the Commons Treasury Committee, which claims that he should have acted earlier to deal with the lack of liquidity in the interbank market.

After months of speculation, The Times can also reveal that Mr King wants to be reappointed for a second term, despite his increasingly tense relationship with the Treasury over measures to prevent a repeat of the Northern Rock fiasco.

Political sources say that he believes that any decision not to renew his tenure at the end of June would be seen as an unjustified blot on the Bank’s handling of the crisis and recent events.

Gordon Brown is understood to be waiting until the Northern Rock problem is solved but a buyer will probably not be found before February. A resolution may take even longer if, for want of a buyer, the bank is nationalised.

One emergency plan, which the Government is understood to be drawing up, is to split Northern Rock between Britain’s high street banks.

This would allow the Government to take a back seat while reducing the cost to the taxpayer. It would also prevent any disruption that the nationalisation of the bank would inevitably bring to the mortgage market.

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