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Central banks inject billions more in cash

European Central Bank again leads the pack with $84 billion

By Simon Kennedy & Greg Robb, MarketWatch
Last Update: 5:20 PM ET 8/10/07

LONDON (MarketWatch) -- Central banks in Europe, Asia and the U.S. injected billions of dollars into banking systems Friday, moving to further boost liquidity in markets suffering the ripple effect of the subprime-credit crisis and saying they stood willing to provide more cash.

The European Central Bank said it had provided 61 billion euros ($84 billion) to banks in a three-day tender offer, and the U.S. Federal Reserve carried out two three-day repurchase agreements totalling $35 billion, while the Bank of Canada injected C$ 1.68 billion ($1.78 billion).

In Asia, the Bank of Japan supplied 1 trillion yen ($8.48 billion) after a rise in the overnight call rate. And The Reserve Bank of Australia added A$4.95 billion ($4.17 billion).

The Fed said it will provide reserves "as necessary" to promote trading in the federal funds market at rates close to 5.25%, the base rate. See full story. Other central banks made similar pledges about being willing to lend more.

The overnight rates at which banks lend money to each other rose again Friday, with the dollar-denominated rate hitting 5.96% from 5.86% the previous day, according to data from the British Bankers' Association.

The loans by the ECB follow the roughly 95 billion euros it handed out in its biggest-ever cash injection Thursday, in the aftermath of overnight interest rates spiking. See archived story.


Unlike on Thursday, however, the ECB's latest loans didn't match all the demands made. It received 62 bids for a total of just over 110 billion euros, the central bank said. The weighted average allotment rate was 4.08%, it added.

The announcements came amid another day of sharp retreat for global stock markets, with the U.K.'s FTSE 100 index (UK:UKX) giving up as much as 3% as financial services stocks led the declines. See Europe Markets.

And in the U.S., the Dow industrials fell sharply, on the heels of Thursday's sharp slide. See Market Snapshot.

Banc of America Securities analyst Kamal Sharma said the latest ECB operation was a sign it's willing to soothe market tensions but doesn't want to flood the markets with liquidity.

"The message appears to be that liquidity is available at any time the ECB believes it is needed, but, with the overall monetary policy framework and the stated commitment to hike rates in September, liquidity will not be provided at any cost," Sharma said in a note to clients.

Analysts at Fortis Private Investment Management, however, were more critical of the mixed message coming from the ECB, noting that a further interest-rate hike remained on the agenda.

"Surely, the whole idea of raising interest rates is to curtail credit," the Fortis analysts said in a note to clients.

"Exasperation metamorphoses to pure bafflement, however, when one reads ECB utterances stressing how they are determined to carry on raising interest rates later in the year," Fortis added.

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