Central banks pump billions into money markets

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The Bank of England today said it would pump 40 billion US dollars (£22.3bn) into money markets as part of a co-ordinated move by major central banks.

The overnight lending by the BoE is being made in conjunction with the US Federal Reserve and alongside similar actions by the European Central Bank, Bank of Canada, Bank of Japan and the Swiss National Bank.

The Bank said: "These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets.

"The central banks will continue to work together closely and will take appropriate steps to address the ongoing pressures."

The first such lending operation took place today and involved US dollar funds against eligible collateral.

The European Central Bank said it joined forces with the Fed and central banks of Canada, Switzerland, Japan and Britain to boost liquidity in global financial markets.

The ECB and the Bank of England said they would each offer up to $40 billion in overnight funds. The Fed said it would authorise $180 billion expansion of temporary foreign currency swap arrangements and Bank of Japan announced it would launch dollar-supply operations as part of the worldwide effort to tackle the dollar shortage.

"The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures," the ECB said in a statement.

The concerted action follows a rout in financial markets, roiled by fears of more Wall Steet failures after a week that saw Lehman Brothers file for bankruptcy, Merrill Lynch lose its independence and a $85 billion US government bailout of insurer AIG.

Overnight US dollar funding costs fell to 2 per cent after the central bank action, compared with around 5 per cent the previous day in Europe and as high as 8.5 per cent in Asian trading on Thursday.

"Obviously it does not tackle the underlying root causes of the problem, but it does help to release some of those immediate tensions that have been building up in the money market," Ian Stannard, senior currency strategist at BNP Paribas.

Earlier on Thursday central banks in Japan, Australia and India pumped a further $28 billion into money markets while China relaxed its policy for the second time this week.

South Korea sold dollars in the swap market and said it would try to halt the slide in bond prices, the Philippines intervened to support the peso, and Taiwan warned it could use a state fund to prop up stocks as markets whipsawed across the region facing it toughest test since the Asian financial crisis of 1997.

Overnight, news emerged of takeovers involving No. 2 US investment bank Morgan Stanley (MS.N), top US savings and loan Washington Mutual (WM.N) and major UK mortgage lender HBOS (HBOS.L), reflecting the seismic change in the global financial landscape.

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.

Banks around the world have responded to the squeeze, exacerbated by investors' flight into safe havens of gold and government bonds, by flooding markets with cash and verbal reassurances, but with only limited success.