“Other assets” on the Bank of England’s balance sheet rose by a further £3.0 billion in the week to Wednesday 17th October, bringing the total increase since the run on Northern Rock started to £16.0 billion. This is the best available estimate of the extent of the Bank’s support to the lender.

Remarkably, the previous week’s estimate of £12.9 billion was confirmed by Northern Rock chairman Matt Ridley before the Treasury committee on Tuesday. Dr. Ridley stated that “the sums involved that have been reported of around £13 billion are approximately correct”.

The weekly increase of £3.0 billion is up from £2.3 billion and £2.9 billion in the prior two weeks, indicating that Northern Rock’s funding problems remain acute. There had been hopes that the rate of increase would slow following the Government’s announcement last week that its guarantee would be extended to new retail deposits.

As argued earlier, the Bank’s injection of funds into Northern Rock contributed to an easing of money market conditions, reflected in a fall in three-month interbank interest rates from a high of 6.90% on 11th September to a low of 6.24% on 5th October. However, the Bank has acted to reverse this effect in recent weeks by reducing the volume of lending to banks in its normal market operations and taking other steps to drain liquidity. The banking system’s reserves at the Bank have fallen from a peak of £30.0 billion on 25th September to £21.7 billion yesterday, while three-month interbank rates have firmed to 6.29% and remain unusually high relative to the 5.75% Bank rate. The Bank should arguably have allowed the higher level of reserves resulting from its support to Northern Rock to remain within the system until the interbank market had normalised.