In principle the sterling interbank rate should be close to both the Bank of England's repo (repurchase agreement) rate and base rate. In fact a shortage of cash has driven a wedge, sometimes of more than 100 basis points, between the repo rate and three-month inter-bank rate. Should the Bank have intervened on a larger scale to eliminate the shortage?

Some City analysts have beencritical of the Bank, claiming thatthe jump in inter-bank rates is anun-intended and damaging tightening of monetary policy. But a case can be made that the Bank has been in a difficult position only partly of its own making. In their search for profit British banks have over the past 50 years economised to a remarkable and perhaps dangerous extent on their holdings of cash and liquidity. This has left the system too vulnerable to a breakdown of trust in the markets.