It was not surprising to see a further fall as markets reflected on the absence of good information on how big the losses have been so far on difficult loans, and who has incurred them.

The Central Banks??must have realised markets would fall further whilst all the uncertainties about future interest rate levels and banking losses ??remained. Their silence on cutting interest rates is deafening. The markets yesterday??moved in the direction of thinking ??the Bank of England would not increase interest rates again. Sterling fell, and future interest rate pricing adjusted accordingly. The Bank’s monthly cycle of meeting and reporting looks very slow moving now. The Bank’s official position does not rule out a further increase in rates.

The ECB last left markets expecting a further rise in their rates. If and when they change this position it will seem to imply they have given in to French pressure to keep interest rates down. It would also be a sensible response to the slowing of the Italian and French economies and to the movements in the markets.

As readers of this blog will know, I have never thought simply supplying liquidity to the markets solves the problem. It eases daily pressures,and can sometimes fuel rallies in prices, but it does not tackle the underlying reality that banks and investors have lost money and are unsure how big an impact this will have on balance sheets and willingness to enter future transactions.

Confidence can only be rebuilt when we know the magnitude of the impact of the losses and when investors believe Central Banks have shifted from fighting the last war - against inflation - to fighting the next war - against lack of confidence.

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