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March 11, 2008

Central banks act to prevent deterioration in money markets

by Gill Montia

Story link: Central banks act to prevent deterioration in money markets

Central banks are acting jointly to curb any further deterioration in the global money markets.

In the US, the Federal Reserve will make $200 billion available to banks and other financial institutions, while at the same time extending the period of its loans to 28 days.

The Bank of England will auction £10 billion on March 18th, which will be followed by a further injection of cash in mid-April.

The European Central Bank, the Bank of Canada and the Swiss National Bank are involved in similar actions, which should free up lending between commercial banks.

In the case of the Federal Reserve, the $200 billion on offer is in addition to the $200 billion facility announced on Friday of last week.

Since the autumn of last year, banks have been wary of lending to each other, even overnight, because the full extent of their losses relating to US sub-prime mortgages is unknown.

As a result, the credit markets have virtually dried up and from time to time central banks have been injecting money into the markets in an attempt to prevent the economic downturn that could result from the credit squeeze.

 

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