FRANKFURT – THE European Central Bank (ECB) said yesterday it is prepared to ‘act accordingly’ in the light of renewed market volatility, a sign that instead of keeping its benchmark interest rate unchanged at 4 per cent, it could actually lower it.
It did not explain why it issued the statement, a surprise that caught markets off-guard and produced mounting speculation about what path it could take.
Instead, the ECB, which sets monetary policy for the 13 countries that use the euro, said it may take action at a meeting of its Governing Council today to ‘contribute to orderly conditions’.
‘Volatility in the euro money market has increased and the ECB is closely monitoring the situation,’ the bank said in an unexpected announcement.
‘Should this persist tomorrow, the ECB stands ready to contribute to orderly conditions in the euro money market.’
The message had some market observers conjecturing that the ECB may be poised to mirror a move by the United States Federal Reserve and lower its own lending rate for overnight funds, its marginal lending facility.
That facility has stood at 100 basis points more than the main refinancing minimum bid rate for years.
Within minutes of the ECB announcement, the overnight interbank lending rates dropped to between 3.99 per cent and 4.11 per cent, from between 4.64 per cent and 4.76 per cent.
In London, the Bank of England offered to provide extra cash to reduce ‘unusually high’ overnight lending rates in its monthly market operations, reflecting concern about dwindling credit levels spurred by the collapse of the US sub-prime mortgage market.
In its first statement since the fear of shrinking credit gripped global markets, Britain’s central bank said it had raised its aggregate reserves target for next month by 6 per cent to relieve pressure on overnight rates, and it was ready to add 25 per cent more if overnight rates remain high.
However, it added that it should not be expected to take additional action to reduce banks’ three-month borrowing costs, which have jumped to their highest rate in almost nine years, as banks become increasingly reluctant to lend to rivals until the extent of the crisis is known.
The key three-month interbank lending rate, or Libor, is now 6.8 per cent, more than a full percentage point above the 5.75 per cent base rate and just above the Bank of England’s emergency lending rate of 6.75 per cent.
The central bank is expected to keep its benchmark interest rate unchanged at 5.75 per cent today.
Separately, a senior US Treasury Department official warned yesterday that turmoil in credit and mortgage markets was ‘far from over’ and policymakers must remain vigilant to the need to protect the broader economy.
‘I do want to caution policymakers that this process is far from over,’ Treasury Undersecretary Robert Steel said in prepared testimony for delivery to the US House of Representatives Financial Services Committee.
As expected, the Bank of Canada and Reserve Bank of Australia left their rates unchanged yesterday.
ASSOCIATED PRESS, REUTERS
Source: The Straits Times 6 Sept 07