ECB, BoE turn on funding taps to ease crunch

By Mike Peacock

LONDON (Reuters) - The European Central Bank and Bank of England flooded money markets with funds on Tuesday as the UK central bank chief warned of a possible downward spiral in credit conditions.

The Bank of England (BoE) charged a minimum bid rate of 5.36 percent for 10 billion pounds of 3-month money, as part of a coordinated action with other central banks to ease market tensions by offering cash at favorable rates.

The money was taken up though demand was muted, despite its being offered at below official BoE lending rates, suggesting a less urgent need for funding than had been feared.

But Bank of England Governor Mervyn King said banks were still deeply concerned about the liquidity crunch.

"Banks themselves have been worried that the impact of their reluctance to lend will lead to a sharper slowdown in the United States," King told a parliamentary committee.

"That concern is a serious one because it does hold out the prospect that there will be a self-reinforcing downturn in credit and activity."

The ECB scrapped the usual upper limit on how much it lends to banks in Tuesday's offering of two-week money, to ensure lending rates stayed close to its target of 4 percent.

Banks clambered in, snapping up a hefty 348.6 billion euros ($500 billion) at a 4.21 percent lowest rate.

Two-week Euribor interbank rates fixed sharply lower in response while London interbank offered rates for three-month sterling also fell, on the back of the BoE auction.

The ECB offer was the first time it had said it would meet all banks' bids above a certain rate since its first liquidity injection on August 9, as the credit crunch blew up.

"They're throwing everything they can at the liquidity problem," said one trader.

On Monday, the ECB offered $20 billion of 28-day funds at auction as part of the joint plan by leading central banks to alleviate strains in the interbank lending market.

The Federal Reserve offered a similar amount, while the Swiss National Bank (SNB) offered up to $4 billion at a discount to the Fed's existing discount rate.

Results of those auctions are due on Wednesday.

Most experts say the joint action, whereby the Fed, SNB, ECB, BoE, Bank of Canada and others provide fresh short-term lending, is unlikely to solve the crisis alone.