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How can the Bank of England increase mortgage liquidity?

Only 24 hours ago it seemed certain that the Bank of England was to introduce a fee of around 0.25% on funds held on behalf of UK banks with the Bank of England. However, today Mervyn King has denied these allegations and confirmed there are no immediate plans to change the interest received on money held with the Bank of England on behalf of UK banks. So how can the Bank of England now increase liquidity in the mortgage market?

There is no doubt that the reduction in the rate of interest received by UK banks on funds held with the Bank of England would have focused their minds more upon the commercial market and greater returns. Many people believe this was the Bank of England's best tool and a new threat to the UK banking industry but so far it still remains unused. Behind the scenes there is concern that once the UK quantitative easing program ends, whenever this may be, a short-term rush of liquidity will be required to fill the void left by the funding programme. So how do the regulators persuade UK banks to increase their liquidity in the mortgage market?

This is a very difficult situation for the UK regulators, the Bank of England and the government.

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