Market participants are discussing reports of a massive contraction in sterling interbank lending activity since the onset of the “credit crunch” in August. According to Bank of England figures, the outstanding value of UK banks’ market loans to other UK banks fell from £640 billion at the end of August to £249 billion in September and £186 billion in October (see here, P44, bottom panel). However, the figures have been distorted by two major banking groups – apparently HBOS and Bank of Ireland – consolidating the reporting of their subsidiaries. Intra-group lending between these subsidiaries was previously included in the Bank’s series for total interbank loans but is now being netted out. According to the Bank’s statisticians, after adjusting for such “changes in the reporting population” interbank lending has contracted by only £3 billion – not £454 billion – between August and October (see top panel in above table).

Our MPC-ometer model suggests a narrow 5-4 vote in favour of a 25 b.p. rate cut this week but the argument that easing is needed to offset a seizure of interbank lending activity is a red herring.