Fed and Bank soothe markets

By Ruth Pitchford

LONDON (Reuters) - The Bank of England made a U-turn on Wednesday, offering to inject cash into money markets to reduce bank borrowing costs, after the U.S. Federal Reserve cut interest rates sharply to ease the global credit crunch.

But Japan's central bank chief sounded a note of warning, reminding investors that low interest rates can spur risk-taking of the sort that triggered the credit squeeze, and a European Central Bank policymaker said market turbulence was not over yet.

The U.S. Federal Reserve slashed its benchmark rate by half a percentage point to 4.75 percent on Tuesday, prompting money to flow more freely in credit markets where fear of exposure to high-risk debt has made banks scared of lending to each other.

The Bank of England followed up on Wednesday by saying it would offer 10 billion pounds in funding next week to help bring down three-month market interest rates.

Governor Mervyn King had resisted lending money to the market beyond the very short term on the grounds it was not the central bank's job to rescue investors who make bad decisions.

The iTraxx Crossover index, closely watched as a barometer of European credit market risk sentiment, broke below 300 basis points for the first time since July 17 as the central bank moves restored some risk appetite.

Benchmark London interbank rates for overnight dollar deposits were fixed at 4.94375 percent -- the lowest since May last year -- while the three-month sterling rate was fixed at 6.55125 percent, the lowest since August 15.

NOT OVER YET