The Bank of England is to inject £5 billion into the UK money markets as the collapse of Lehman Brothers hits worldwide equity markets.

The European Central Bank is also putting €30 billion into the markets along with the Swiss National Bank – in a move being seen as a quick fix solution amid the uncertainty.

In the US, the Federal Reserve has made similar moves, widening the collateral it accepts for loans to securities firms.

The cash injection – called an “exceptional fine tuning operation” – takes the form of a three-day loan to aid the short-term liquidity of the market.

A Bank of England spokesperson said: “This is the kind of thing we do from time to time and we last offered exceptional fine tuning in March.”

The Bank of England has been in contact with authorities in the US during the weekend and the Financial Services Authority (FSA) that oversees UK banking as the crisis has developed.

The central bank maintains it will be carefully monitoring the conditions in sterling money markets and will take appropriate actions if necessary to stabilise those markets.

Howard Archer, chief UK economist at Global Insight, said: “There is obviously widespread concern about other bank’s exposure to
Lehman Brothers, not only in the US but also in Europe.

“Lehman’s collapse also increases concerns that other banks could fail. As a result, banks are likely to become even more reluctant to lend to each other, thereby increasing the risk that the credit crunch will deepen and last for some considerable time to come.

“This in turn increases the already serious downside risks to growth in the UK and the eurozone, and heightens the danger of recession. Hence, central banks’ keenness to provide extra liquidity.”

He added: “The form and extent of further central bank action will clearly be determined by how serious they perceive the fall-out from Lehman Brothers’ collapse is and what happens in the financial markets. It could ultimately lead to earlier than expected interest rate cuts by the Bank of England and the European Central Bank.”