Fed Leads Co-ordinated Central Bank Move

Fed leads co-ordinated central bank move
By Robin Harding in Washington
The US Federal Reserve has slashed the rate it charges other
central banks for access to dollars in an effort to counter a deepening credit
squeeze in the eurozone that threatens global growth.

As part of a co-ordinated action with the Bank of Canada,
the Bank of England, the Bank of Japan, the European Central Bank and the Swiss
National Bank the Fed is cutting the penalty that it charges over a basic rate
from 100 basis points to 50 basis points.
The move highlights both the deepening credit squeeze in
Europe as the sovereign debt crisis deepens and the extent of concern at the
Fed about how much the euro crisis could damage US growth.

It is also a tacit admission that the swap lines were not
effective at the higher price because they attracted little demand from
European banks. The ECB uses the dollar liquidity swaps to make dollars
available to European banks.

“The purpose of these actions is to ease strains in
financial markets and thereby mitigate the effects of such strains on the
supply of credit to households and businesses and so help foster economic
activity,” said the statement.

As part of the move, each central bank is setting up similar
swap lines for the others in its own domestic currency, so that US banks can
access yen or British banks can borrow Swiss francs. But the only demand at the
moment is in the eurozone where banks are facing growing struggles to fund
themselves in any currency in the private markets.

The Bank of Japan said in a statement: “There is ... a
possibility that Japan will be adversely affected, should conditions in global
financial markets deteriorate further. The Bank of Japan will continue to
maintain financial market stability in close co-operation with other central
banks.”