Tuesday, September 16, 2008

Central Banks Add Liquidity Overnight, But Fail To Push Rates to Targets

Huge money injections were made overnight, but they still weren't large enough to push rates completely back to various central banks' target rates. Not a good sign

The European Central Bank injected €70 billion ($100.17 billion) in one-day funds into euro-zone money markets, more than double its Monday injection of €30 billion. The Bank of England offered £20 billion ($36.05 billion) in extra two-day funds, atop Monday's £5 billion in extra three-day funds. None of this pushed the rates to target.

The Swiss National Bank also made extra overnight funds available, but a spokesperson declined to say how much. The Bank of Japan injected ¥2.5 trillion ($23.84 billion) into Japanese money markets in two separate operations.

The interest rates on loans euro-zone banks make to one another overnight increased again Tuesday, rising to a high of 4.61%, well above the ECB's policy rate of 4.25%. After the ECB announced it would renew its overnight fund injection, rates fell to 4.43%, still above the bank's target. The ECB prefers to keep the difference between the inter-bank lending rate and its own short-term target to a few hundredths of a percentage point.

The Bank of England's injection brought the cost of borrowing overnight cash down from 8% to 6%. But this is still a full percentage point above the U.K. base rate.

-Robert Wenzel

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