ECB offers extra cash to banks to reduce credit costs
The European Central Bank said it will offer extra cash to banks to reduce the cost of credit, just hours before it is due to decide on interest rates.
The overnight deposit rate for euros fell 20 basis points to 4.05 percent after the ECB's announcement. It had risen to 4.68 percent yesterday, a six-year high and above the ECB's benchmark refinancing rate of 4 percent.
Money-market rates increased after European banks acknowledged their vulnerability to rising defaults on American subprime mortgages, aimed at borrowers with a poor credit history. Central banks added more than $350 billion to money markets between Aug. 9 and Aug. 14 to smooth lending between banks.
Today's move is "a sensible thing to do by the ECB," said Ulrich Karrasch, a money-market trader at Unicredit Banking and Investment in Munich. "I would have still preferred a longer term refinancing operation just to take the insecurity out of the market. The size of it won't be anything like we had on Aug. 9."
The ECB today called for bids in a one-day refinancing operation tender with a 4 percent minimum bid rate. Bids must be submitted by 9:35 a.m. Frankfurt time. The ECB did not specify an intended volume. On Aug. 9, it loaned 94.8 billion euros ($129 billion) to ease lending between banks.
The Bank of England yesterday joined the world's major central banks in easing lending between commercial banks, by offering to provide additional cash to reduce "unusually high" overnight interest rates. The U.S. Federal Reserve on Aug. 17 unexpectedly lowered its discount rate, at which it makes direct loans to banks, by 0.5 percentage point to 5.75 percent.