Bank relaxes collateral rules to ease funding strains

LONDON (Reuters) - The Bank of England announced on Friday it would extend the range of collateral it accepts at its weekly three-month cash auctions to include some triple-A rated corporate and consumer loans.

The move is the latest step by policymakers to ease a crisis of confidence in the banking sector that has sent interbank lending rates sky-high.

"In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity," Bank Governor Mervyn King said.

Analysts said the moves would help ease the liquidity squeeze but did not rule out further action.

"They're pulling out the stops to try and solve the problems in the interbank markets and it's another step in that direction," said Paul Dales at Capital Economics. "They've got quite a lot of ammunition in their hands and they are slowly releasing it as the events warrant."

The Bank said it would offer 40 billion pounds at its next auction on Oct 7 and would continue the weekly extended collateral auctions until at least Nov 18.

Given the broadening of collateral, there will be a minimum bid rate of 50 basis points above the relevant overnight index swap.

Some detected a change in tone from King who came in for heavy criticism last year for not responding quickly enough to the credit crisis.

"It's the comment from King that makes the difference," said Brian Hilliard, chief UK economist at Societe Generale. "The main message is that, unlike a year ago, the Bank is not going to drag its feet.

(Reporting by Christina Fincher and Golnar Motevalli)