Fed, ECB and Bank of Japan move raises cost of borrowing dollars.
The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.
The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion “to address the continued elevated pressures in US dollar short-term funding markets.” The Bank of England, the Bank of Canada and the Swiss National Bank also participated.
Finance officials have struggled to restore confidence in markets this week as investors stockpiled money amid mounting concern more banks will follow Lehman Brothers Holdings Inc into bankruptcy. The cost to hedge against losses on US government debt climbed to a record yesterday, the UK government was forced to sponsor a rescue of mortgage lender HBOS Plc and Russia poured money into its banks.
“There’s a complete lack of faith in the markets,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc in London. “There’s a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.”
Financial markets welcomed the announcement by pushing the cost of borrowing in dollars overnight to 3.84 per cent from 5.03 per cent yesterday. It was 2.15 per cent last week and reached its highest since 2001 on September 15.
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Limit Doubled: The Fed will spray the dollars around the world via swap lines with other central banks who can then auction them in their own markets. The ECB, Bank of England and Swiss National Bank allotted a total of $64 billion for one day today.
Under the new arrangements, the ECB doubled its limit of dollars it can get from the Fed to $110 billion and Switzerland’s central bank can offer $27 billion, an extra $15 billion. New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorised until January 30.
The ECB said it would offer $40 billion “for as long as needed” in overnight funds to the region’s banks. It will also increase by $5 billion the amount it lends for 28 days and 84 days to $25 billion and $15 billion. The Swiss National Bank will boost its 28-day auctions to $8 billion and the 84-day offering to $9 billion. Both were previously $6 billion.
Use as Needed: The Bank of Canada said it has decided not to draw on its $10 billion swap facility at this time. The Bank of Japan, whose policy board held an emergency meeting today, said it will use its $60 billion as required by market conditions.
In auctions of their own currencies, the ECB today lent ¤25 billion in one-day money and the Bank of England £66.2 billion in one-week loans.
The action is the latest attempt by central bankers to coordinate their response to the financial crisis which deepened this week after Lehman tumbled into bankruptcy, Merrill Lynch & Co was sold and the US government bailed out insurer American International Group Inc. Central bankers had this week pushed more than $200 billion into markets with those in Japan and Australia doing so again today.
Swap lines were first established in December when officials joined forces to boost dollar liquidity around the world after interest-rate reductions in the US, the UK and Canada failed to ease concerns about bank lending. The Fed increased its link with the ECB in July.
Share Prices Gain: The announcement today boosted European shares and US futures, which have been pummeled this week as contagion spread through financial markets. Europe’s Dow Jones Stoxx 600 Index, which has dropped 8 per cent, gained 0.8 per cent to 260.15. Futures on the Standard & Poor’s 500 Index added 1.2 per cent. More than $19 trillion has been wiped off the value of global stock markets since Oct 31.
Failure to calm markets will see central banks inject even more cash, said Robert Barrie, an economist at Credit Suisse Group in London. Other options central banks could take include accepting greater collateral denominated in foreign currencies and increasing lending to banks abroad.
“The lack of dollars has been making the financial crisis worse around the world, which is why we now have this coordinated response,” Barrie said.
Since the credit squeeze began in August 2007, central banks have sought to keep apart the need to soothe markets and to combat inflation.
They argue that interest rates are a blunt tool for helping markets and that price pressures prevent them from cutting rates. While the Fed slashed its key lending rate to 2 per cent it has left it there since April. The Bank of Japan kept its at 0.5 per cent this week and the European Central Bank increased its benchmark to a seven year high in July.
If the spasms in the markets continue and threaten to derail growth the central bankers may shift, although for now they will want to wait, said Kevin Gaynor, head of economics at Royal Bank of Scotland Group Plc in London.
“Partly this is to keep powder dry and partly because cutting interest rates won’t make much difference,” he said.