Central banks turn on funding taps to tackle market squeeze
The world’s top central banks joined forces on Thursday to throw a multi-billion dollar lifeline to global markets in a dramatic effort to free up bank-to-bank lending, frozen by the upheavals on Wall Street.
In a surprise move, the U.S. Federal Reserve made an extra $180 billion available to central banks around the world to lend on to their local commercial banks in a bid to get dollars circulating in overnight and term money markets.
Central banks including the Bank of England and the European Central Bank also lent out extra funds in their own currencies as markets reeled in the wake of a round of takeovers and mergers among top financial firms and renewed concerns about how the U.S. economy will weather the storm.
Well-oiled money markets, where banks lend short term funds to each other to smooth out daily swings in their balances, are crucial for the proper functioning of the financial system and the economy at large.
Central banks have responded to a jump in interbank lending rates, exacerbated by investors’ flight into safe havens of gold and government bonds, by flooding markets with cash and verbal reassurances but so far with only limited success overnight payday loans.
Analysts said the extra funds calmed markets, but this would likely prove only temporary and noted mixed demand from banks for the extra funds on offer in auctions on Thursday.
While euro-zone banks bid heavily for both dollars and euros, their British counterparts showed little interest in dollars but bid 202.03 billion pounds ($359.9 billion) for the 66.21 billion pounds on offer in a BoE open market operation — the equivalent of 1/7 of the UK economy.
The Bank of Japan and the Bank of Canada also took part in the global action, which runs until the end of January next year, and agreed new dollar swap lines with the Fed, although they did not announce immediate plans to use them.
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