Interbank Lending Rates Still Fail to Respond to Central Bank Action

The actions announced by five central banks two days ago continue to leave the money markets unpersuaded. From Bloomberg:

The biggest concerted effort by central banks in six years to restore confidence in global money markets is showing little sign of success.

The rates banks charge each other for three-month loans held at seven-year highs for a second day after policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed to ease the logjam in short-term credit markets. The cost of borrowing in euros stayed at 4.95 percent, the British Bankers’ Association said today, up from last month’s low of 4.57 percent and 3.68 percent a year ago.

“The market clearly doesn’t believe central banks can do anything about this crisis,” said Nathalie Fillet, senior interest-rate strategist at BNP Paribas SA in London. “This is not going to be a magical solution to the problem.”……

The cost of borrowing for three months in dollars fell 2 basis points to 4.97 percent, the BBA said today. That’s 72 basis points higher than the Federal Reserve’s target rate, up from an average of 11 basis points in the first half of the year and 16 basis points at the end of October.

The rate for pounds dropped 1 basis point to 6.5 percent, 100 basis points higher than the Bank of England’s benchmark interest rate. The spread averaged 34 basis points more than the central bank’s key interest in the first half and is up from 53 basis points at the end of October.

Stocks fell, with the Standard and Poor’s 500 Index declining 0.4 percent. The so-called TED spread, the difference between the amount the government and banks charge for three- month loans, was at 2.1 percentage points, up from 0.35 percentage point at the start of the year, signaling increased reluctance among banks to lend.

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  1. Anonymous

    When the TAF was announced with participation by the BoC, BoE, ECB, Fed, and the Swiss National Bank, there were also vague statements of support issued by non-participants the BoJ and the Swedish Riksbank.

    I mean absolutely no disrespect to Sweden (or Switzerland or Canada, for that matter), but if it was considered absolutely essential to have the Riksbank chime in with three short content-free paragraphs (“blah blah.. welcomes these measures… monitoring developments closely… blah blah…”), how much more psychologically effective would it have been to get on the phone to the People’s Bank of China and wheedle some kind of press release out of them?

    “Jolly good show… best wishes… when this is over, 1.4 trillion vultures will pick over the bones of your festering corpses muhahaha哈哈… oops, I mean: go, you!… carry on, then”

    China is very big on international prestige (hence the Olympics), so this would have been an excellent opportunity to “give them face” as a key player. Of course, China would not be expected to actually do anything, but that’s not the point… the whole exercise was purely psychological anyway.

    It seems like an excellent opportunity missed. Unless they’re keeping this in reserve for “Shock and Awe, part II: Even Newer Clothes”.

  2. mike

    This TAF thing has got to be the slickest card up Ben’s sleeve imaginable!

    Has anyone noticed that this isn’t about “who is in trouble” but about getting money to banks in need? So the winning bidder(s) will remain anonymous?

    Update me on the Discount Window. After the four Big Banks took $500 million apiece from the Discount Window to prove there is “No stigma in paying too much interest for money,” did any banks follow? I haven’t heard of any.

    The TAF will be different. Winners will be anonymous. Will the bids and amounts be announced?

    This could be a new level of opacity in government & banking.

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