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Central bankers make ready extra funds

The central banks of the United Kingdom and Switzerland promised extra funds to ease pressure on interbank lending rates yesterday while the European Central Bank said it is ready to add extra liquidity as needed.

The reassuring moves from Europe’s three largest central banks helped to boost European stocks. “The ECB continues to closely monitor liquidity conditions and notes tensions in short-term rates as the end-of-quarter approaches, notwithstanding the ample liquidity conditions,” the European Central Bank said. “The ECB stands ready to provide additional liquidity if needed.” Meanwhile the Bank of England (BoE) offered £13.62 billion at its regular one-week money market operation at 1000 GMT, up from £10.93 billion the previous week. The Swiss National Bank (SNB) offered three-month funds at 2.20% in a move seen as an attempt to ease money market tensions due to fear of future losses in the banking sector.

Analysts said the auction may also be an attempt to bring the SNB’s key interest rate - three-month LIBOR - back into line with its targeted rate of 2.75% after it rose to around 2.85% on Wednesday. Traders and analysts said extra liquidity would be welcomed given fresh tensions on markets which have pushed short-term interbank lending rates up to their highest level this year. “It’s not surprising. Just continuing efforts on the part of central banks to shore up liquidity in the money markets. The need for liquidity is becoming particularly acute into month-end, quarter-end,” said Richard McGuire, fixed income strategist at RBC Capital Markets.

European banks have rushed to borrow from central banks over the last week amid renewed concerns about the impact of financial market turbulence, exacerbated by the upcoming end-of-quarter period when many have obligations to meet. The ECB loaned banks an extra €15 billion to tide them over the Easter holiday period and topped up lending at its last weekly auction by 50 billion, although its generosity has failed to have much impact on market rates.

At 1000 GMT the bid/ask spread on overnight cash was 4.07/4.12%, above the ECB’s 4% benchmark. Benchmark overnight EONIA rates fixed at 4.187% on Wednesday and one-week and three-month interbank rates are at three-month highs. “It seems to be the same old story - there’s a scramble for cash at the moment,” a money market trader in Dublin said. “There’s been pressure in the market all week. Even with extra liquidity the ECB put in at the 1-week tender, there’s still pressure out there.” The ECB, the BoE, the SNB and the US Federal Reserve announced a second round of coordinated liquidity injections earlier this month, following actions in December which succeeded in calming money markets around the turn of the year.

Euro zone banks have shown strong appetite for central bank funds in recent days, bidding the lowest rate for three-month moneys up to 4.44% on Wednesday, the highest since November, and the rate at the ECB’s last weekly funds tender up to a six-month high. Tenders for US dollar funds by the ECB and the Swiss National Bank earlier this week, part of the latest round of coordinated global liquidity injections, were also massively oversubscribed. (people.com.cn)