Central Banks Add $120 Bln to Markets, Rate Cuts Seen (Update5) By Mark Gilbert and Bethan Thomas
London, Sept. 12 (Bloomberg) -- Central banks pumped almost $120 billion into the money markets, signaling they may reduce interest rates to avert the risk of a global recession following yesterday's terrorist attacks in the U.S.
The European Central Bank said it lent about $63 billion of overnight funds in an unscheduled tender, about the same as it typically lends in two-week money at regular weekly auctions. The Bank of Japan pumped almost $17 billion into the money markets.
``Everybody's pretty traumatized and that's going to affect consumer confidence, and therefore the possibility of a U.S. recession is that much greater,'' said Martin Price, who helps oversee about $2.1 billion at Chiswell Associates. ``It reinforces the likelihood of interest-rate cuts.''
The Federal Reserve added $38.25 billion in temporary cash to the banking system when it arranged overnight repurchase agreements, or repos, a Fed Bank of New York spokesman said. The central bank also said it may come back into the money markets to add more money with additional repos, he said.
Today's Fed action was about 10 times the typical daily cash infusion over the past six weeks and suggests a surge in demand from banks. Separately, the Fed said emergency borrowing by banks rose yesterday.
``Discount window borrowing yesterday was substantially elevated above normal levels,'' a Fed spokesman said. Details will be reported tomorrow. The Fed lends directly to banks through its discount window to allow them to meet immediate cash needs and reserve requirements. Typically, banks borrow from each other, rather than from the Fed.
No Policy Shift
So far, the Fed's actions don't signal a change in interest rate policy. Following the Oct. 19, 1987, stock market crash, the Fed provided cash to banks and securities firms to keep financial markets functioning. ``The Fed is the lender of last resort,'' Fed Governor Edward Gramlich said yesterday in Tucson after the attacks. ``If credit is needed to make transactions go, the Fed will provide it.''
Gramlich said he was making that statement ``in the spirit'' of a similar statement from Fed Chairman Alan Greenspan in 1987. That suggests the possibility of a rate cut before the Fed's next meeting in three weeks, analysts said. The Fed already reduced rates twice this year in surprise moves between scheduled meetings of the policy-setting Open Market Committee.
Greenspan was due back in Washington today after attending the monthly meeting of the Group of 10 central bank governors in Basel, Switzerland.
The Fed and its peers will be ``looking at some sort of concerted action,'' said Jeremy Baldwin, who helps manage about $15 billion at Colonial First State Investment.
Eurodollar Contracts
The rate on three-month September eurodollar contracts in Singapore fell 28 basis points to 3.06 percent, indicating investors and traders are anticipating lower U.S. interest rates. Trading in U.S. securities was halted elsewhere in the world.
Before trading in fed funds futures stopped yesterday, the implied yield on the October contract fell 8 basis points to 3.13 percent, 37 basis points below the Fed's current 3.5 percent target for overnight loans between banks.
U.S. money-market interest rates set by London commercial banks plunged to a nine-year low. The three-month dollar London Interbank Offered Rate fell 20 basis points to 3.16 percent, the lowest since 1992.
Economists surveyed by Bloomberg News don't expect the ECB to lower its refinancing rate tomorrow from the current 4.25 percent. Of 16 analysts in the survey, 13 expect a quarter-percentage-point cut on Oct. 11, six weeks after the last rate reduction.
ECB `Standing Ready'
``The ECB and the national central banks are standing ready,'' central bank president Wim Duisenberg said. ``The ECB has been in close contact with other major central banks.''
He said it's ``far too early to judge'' what the economic consequences of the attacks are, and suggested that an immediate rate cut ``would rather have inspired a reaction of panic than of stability and calmness.'' The ECB may have to lower its growth forecasts for next year and 2003, he added.
The rate on the euro interest-rate contract for September settlement declined 1 basis point today, extending its two-day drop to 11 basis points and driving the rate to 4.10 percent. That's far enough below current three-month lending rates of 4.24 percent to indicate some investors and traders see a cut in ECB interest rates as more likely than at the beginning of the week.
The ECB, which has a key lending rate of 4.25 percent after two quarter-point reductions this year, meets tomorrow. None of 26 economists surveyed by Bloomberg News prior to yesterday's terrorist attacks expected a cut.
Economy Will Suffer
``The U.S. economy is going to suffer, and is already on the brink of recession,'' said Iraj Abedian, chief economist at Standard Bank Investment Corp. in Johannesburg. ``The question is to what extent the European Union is going to compensate.''
The Fed, which has cut its benchmark lending rate to a seven- year low of 3.5 percent this year with seven reductions, next meets to set policy on Oct. 2.
Futures markets are indicating ``further rate cuts and recession, and probably inter-meeting cuts,'' said Peter Osler, research director at London brokerage GNI Ltd. Also, ``the Federal Reserve will be providing liquidity at the discount window, which is cheaper than the fed funds rate.''
U.S. economists had been forecasting a rebound in domestic growth. The Blue Chip Economic Indicators consensus forecast released in August showed the economy would probably expand at a 1.7 percent rate in the current third quarter and a 2.8 percent pace in the final three months of the year.
Aggressive
``The economy was turning around and then this happens,'' said Hans Redeker, chief currency strategist at BNP Paribas SA. ``It is absolutely necessary that central banks should provide enough liquidity for the markets.'' He expects central banks to be ``aggressive'' in cutting rates to bolster growth.
Stocks rose today in Europe, after falling in Asia. Japan's Nikkei 225 stock average slid 6.6 percent to its lowest level in almost 18 years. In Europe, the U.K. benchmark FT-SE 100 Index gained 2.2 percent, following yesterday's 5.7 percent loss, while Germany's DAX Index rose 0.7 percent and the French CAC 40 Index rose 0.3 percent.
European notes mostly declined after gaining yesterday, while the dollar rose against the euro and yen after falling yesterday.
In the U.K., the rate on the September contract declined 6 basis points, extending its two-day drop to 17 basis points and putting the rate at 4.71 percent. The benchmark Bank of England interest rate has been trimmed four times this year, and is currently at 5 percent.
The Swiss National Bank said it is ready to inject extra funds if needed, though spokesman Werner Abegg said ``the Swiss money market is operating normally today, and special liquidity measures are not currently necessary,'' he said. The SNB provided funds at 3.2 percent, 10 basis points lower than yesterday. www.bloomberg.com/bbn/index.html?centernav=front
London, Sept. 12 (Bloomberg) -- Central banks pumped almost $120 billion into the money markets, signaling they may reduce interest rates to avert the risk of a global recession following yesterday's terrorist attacks in the U.S.
The European Central Bank said it lent about $63 billion of overnight funds in an unscheduled tender, about the same as it typically lends in two-week money at regular weekly auctions. The Bank of Japan pumped almost $17 billion into the money markets.
``Everybody's pretty traumatized and that's going to affect consumer confidence, and therefore the possibility of a U.S. recession is that much greater,'' said Martin Price, who helps oversee about $2.1 billion at Chiswell Associates. ``It reinforces the likelihood of interest-rate cuts.''
The Federal Reserve added $38.25 billion in temporary cash to the banking system when it arranged overnight repurchase agreements, or repos, a Fed Bank of New York spokesman said. The central bank also said it may come back into the money markets to add more money with additional repos, he said.
Today's Fed action was about 10 times the typical daily cash infusion over the past six weeks and suggests a surge in demand from banks. Separately, the Fed said emergency borrowing by banks rose yesterday.
``Discount window borrowing yesterday was substantially elevated above normal levels,'' a Fed spokesman said. Details will be reported tomorrow. The Fed lends directly to banks through its discount window to allow them to meet immediate cash needs and reserve requirements. Typically, banks borrow from each other, rather than from the Fed.
No Policy Shift
So far, the Fed's actions don't signal a change in interest rate policy. Following the Oct. 19, 1987, stock market crash, the Fed provided cash to banks and securities firms to keep financial markets functioning. ``The Fed is the lender of last resort,'' Fed Governor Edward Gramlich said yesterday in Tucson after the attacks. ``If credit is needed to make transactions go, the Fed will provide it.''
Gramlich said he was making that statement ``in the spirit'' of a similar statement from Fed Chairman Alan Greenspan in 1987. That suggests the possibility of a rate cut before the Fed's next meeting in three weeks, analysts said. The Fed already reduced rates twice this year in surprise moves between scheduled meetings of the policy-setting Open Market Committee.
Greenspan was due back in Washington today after attending the monthly meeting of the Group of 10 central bank governors in Basel, Switzerland.
The Fed and its peers will be ``looking at some sort of concerted action,'' said Jeremy Baldwin, who helps manage about $15 billion at Colonial First State Investment.
Eurodollar Contracts
The rate on three-month September eurodollar contracts in Singapore fell 28 basis points to 3.06 percent, indicating investors and traders are anticipating lower U.S. interest rates. Trading in U.S. securities was halted elsewhere in the world.
Before trading in fed funds futures stopped yesterday, the implied yield on the October contract fell 8 basis points to 3.13 percent, 37 basis points below the Fed's current 3.5 percent target for overnight loans between banks.
U.S. money-market interest rates set by London commercial banks plunged to a nine-year low. The three-month dollar London Interbank Offered Rate fell 20 basis points to 3.16 percent, the lowest since 1992.
Economists surveyed by Bloomberg News don't expect the ECB to lower its refinancing rate tomorrow from the current 4.25 percent. Of 16 analysts in the survey, 13 expect a quarter-percentage-point cut on Oct. 11, six weeks after the last rate reduction.
ECB `Standing Ready'
``The ECB and the national central banks are standing ready,'' central bank president Wim Duisenberg said. ``The ECB has been in close contact with other major central banks.''
He said it's ``far too early to judge'' what the economic consequences of the attacks are, and suggested that an immediate rate cut ``would rather have inspired a reaction of panic than of stability and calmness.'' The ECB may have to lower its growth forecasts for next year and 2003, he added.
The rate on the euro interest-rate contract for September settlement declined 1 basis point today, extending its two-day drop to 11 basis points and driving the rate to 4.10 percent. That's far enough below current three-month lending rates of 4.24 percent to indicate some investors and traders see a cut in ECB interest rates as more likely than at the beginning of the week.
The ECB, which has a key lending rate of 4.25 percent after two quarter-point reductions this year, meets tomorrow. None of 26 economists surveyed by Bloomberg News prior to yesterday's terrorist attacks expected a cut.
Economy Will Suffer
``The U.S. economy is going to suffer, and is already on the brink of recession,'' said Iraj Abedian, chief economist at Standard Bank Investment Corp. in Johannesburg. ``The question is to what extent the European Union is going to compensate.''
The Fed, which has cut its benchmark lending rate to a seven- year low of 3.5 percent this year with seven reductions, next meets to set policy on Oct. 2.
Futures markets are indicating ``further rate cuts and recession, and probably inter-meeting cuts,'' said Peter Osler, research director at London brokerage GNI Ltd. Also, ``the Federal Reserve will be providing liquidity at the discount window, which is cheaper than the fed funds rate.''
U.S. economists had been forecasting a rebound in domestic growth. The Blue Chip Economic Indicators consensus forecast released in August showed the economy would probably expand at a 1.7 percent rate in the current third quarter and a 2.8 percent pace in the final three months of the year.
Aggressive
``The economy was turning around and then this happens,'' said Hans Redeker, chief currency strategist at BNP Paribas SA. ``It is absolutely necessary that central banks should provide enough liquidity for the markets.'' He expects central banks to be ``aggressive'' in cutting rates to bolster growth.
Stocks rose today in Europe, after falling in Asia. Japan's Nikkei 225 stock average slid 6.6 percent to its lowest level in almost 18 years. In Europe, the U.K. benchmark FT-SE 100 Index gained 2.2 percent, following yesterday's 5.7 percent loss, while Germany's DAX Index rose 0.7 percent and the French CAC 40 Index rose 0.3 percent.
European notes mostly declined after gaining yesterday, while the dollar rose against the euro and yen after falling yesterday.
In the U.K., the rate on the September contract declined 6 basis points, extending its two-day drop to 17 basis points and putting the rate at 4.71 percent. The benchmark Bank of England interest rate has been trimmed four times this year, and is currently at 5 percent.
The Swiss National Bank said it is ready to inject extra funds if needed, though spokesman Werner Abegg said ``the Swiss money market is operating normally today, and special liquidity measures are not currently necessary,'' he said. The SNB provided funds at 3.2 percent, 10 basis points lower than yesterday. www.bloomberg.com/bbn/index.html?centernav=front
