Central banks' £54bn cash pump

Thursday, 13 December 2007 12:00

The world's central banks have come together to battle the credit crunch by pumping £54 billion into the global money markets.

The Bank of England along with the US Federal Reserve, the European Central Bank and central banks of Canada and Switzerland are offering loans to domestic banks at reduced rates - in an unprecedented move.

It is hoped the move will bring down inter-bank lending rates, which have remained high despite central banks cutting official rates, as the banks hoard cash in the aftermath of the US subprime crisis.

If the move is successful, banks will be able to pass the lower rates onto consumers and mortgage borrowers and hold off an economic slowdown.

Howard Wheeldon, senior strategist at brokers BGC partners, told Independent Radio News this morning: "This is a very positive step in the right direction. It's a concerted action of major central banks but of course it will take time."

But he warned: "We are not going to see a dramatic shift; this does not mean the end of the wholesale credit crisis."

Capital Economics described the joint initiative as "clearly welcome".

"But it does not resolve the more fundamental weaknesses in the major economies: official interest rates will still have to be cut significantly further in the US and the UK, and are likely to fall earlier than generally expected in the euro-zone too," Julian Jessop, economist at the analysts, said.

He added: "Sceptics will note the sums of money involved are not particularly large relative to the size of the underlying problems in credit markets. A similar flurry of measures in August and September - albeit uncoordinated - failed to prevent the credit crunch from worsening again in October and November.

"There is no guarantee this round will be any more successful."

However, Mr Jessop said the move - which involves the Bank of England changing the way it gives out loans by accepting a wider range of collateral - would "tide the markets over the potentially awkward New Year period, and hopefully well into 2008 as well".

The current credit crunch - with banks unwilling to lend to each other - stems from the slump in the US subprime mortgage market. Investors lost billion of pounds when large numbers of homeowners could not meet their mortgage repayments, resulting in investments based on these loans collapsing.

As a result banks became unwilling to lend to each other - a key way many fund lending to consumers - lest they faced further losses.

Mr Jessop concluded: "Overall then, central banks have at least combined to reduce the risk that the credit crunch tips the most vulnerable economies into recession.

"But even if these measures are successful, the world economy is still facing a marked US-led slowdown in 2008."

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