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Money markets take fright after news of Lehman Brothers demise

There is a feeling of 'déjà vu' in the money markets this morning as news that Lehman Brothers has filed for bankruptcy hit the news wires. While not wholly unexpected after recent suggestions that each and every attempted rescue package was floundering it is still a shock to see a bank with over 150 years of history literally disappearing in the space of a few days. So what does this mean to the UK money markets?

As we saw when the credit crunch began, there are signs that UK institutions are again unwilling to lend to each other without pushing rates higher because of the perceived increased risk factors. Despite the Bank of England and European Central Bank injecting nearly £30 billion of liquidity into the markets this morning (to stop them grinding to a halt) there are grave concerns for the next few weeks and months.

As the cost of borrowing ticks higher again this is going to force mortgage lenders to increase their rates - at least in the short term - until the future direction of the market becomes clearer. We saw the main mortgage companies slowly slowly reduce their rates over the last few weeks, now watch them push rates back up in an instant!

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