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ECB to lend $82b to banks, may still raise rate

FRANKFURT – THE European Central Bank (ECB) said it will lend 40 billion euros (S$82 billion) to banks for three months to further support a ‘normalisation’ of the money market and that it may still increase the key rate.

The ECB decided to ‘conduct a supplementary liquidity- providing longer-term refinancing operation’, it said in a statement yesterday. The bank also said that ‘the position of the governing council of the ECB on its monetary policy stance was expressed by its president’ on Aug 2.

Meanwhile, the United States Federal Reserve injected US$2 billion (S$3.06 billion) temporarily into the financial system to ease credit woes that were upsetting global markets.

The Federal Reserve Bank of New York, which handles the overnight repurchase agreements for the Fed, announced the infusion on its website.

The latest injection brought the total to US$103.25 billion added to money markets in repurchase agreements in the past two weeks.

The Fed last Friday unexpectedly cut its discount rate to commercial banks to 5.75 per cent from 6.25 per cent to ease lending between banks.

Market speculation has been feverish that the Fed could cut its fed funds rate before its regular meeting next month.

The ECB has injected emergency funds into the money market over the past two weeks, after the US subprime crisis made some banks reluctant to lend to each other.

Some economists had speculated that the market turmoil would prompt the central bank to keep its benchmark rate at 4 per cent next month.

ECB president Jean-Claude Trichet said on Aug 2 that the bank will show ‘strong vigilance’ on inflation, wording which he has used over the past two years to signal when a rate increase is imminent.

The ECB statement ‘suggests to us that the council continues to view the chances of a rate increase in September as high,’ said Royal Bank of Scotland chief euro-region economist Jacques Cailloux.

The three-month euro money market rate has risen every day for more than five weeks, and was set yesterday by the European Banking Federation at 4.68 per cent, its highest level since May 2001 and up from 4.23 per cent a month ago.

Source: BLOOMBERG NEWS, AGENCE FRANCE-PRESSE, REUTERS (The Straits Times 23 Aug 07)

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