Economist view Central Bank actions as “palliative”

by Gill Montia

Story link: Economist view Central Bank actions as “palliative”

Economists are wary of this week’s action by central banks to injection hundreds of billions of dollars into the money markets.

Stock markets rallied on the news that the US Federal Reserve would not only lengthen the period of its loans to 28 days, but also accept mortgage-backed securities as collateral.

The Bank of England will be offering £10 billion in three-month loans to City lenders, in the hope that this will bring down three-month interbank lending rates, which rose to their highest level in two months yesterday, at 5.79%.

The European Central Bank will provide up to £7.5 billion over 28 days, and the Swiss National Bank is making nearly £3 billion available on similar terms

However, leading economists have warned that the move will only provide a short-term fix.

George Magnus of Swiss investment bank UBS said: “The Central Banks are doing essential work but it’s firefighting. If the banks don’t want to lend, no amount of extra liquidity is ultimately going to help. It is a palliative. The real policy question – how do you instill confidence back into financial markets? – is beyond the Central Banks. It requires government intervention on a major scale.”

According to Rob Carnell of ING; “… this is a palliative to market fragility, rather than a cure. Our initial expectation is that it will take more than this to sort out the current credit problems.”