Maybe It's Time for the ECB To Cut Rates

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Is that an ECB rate cut on the horizon? Markets rallied somewhat on Tuesday, on talk of an intervention to the tune of a 50bps slice off the main refi rate. An ECB spokesman declined to comment on the speculation.

Markets were jumpy: Libor is on the rise, and scares over Spanish banks have refocused fears over Europe’s sovereign debt crisis. And in the midst of the jitters and rumour, Marc Chandler at Brown Brothers Harriman, weighed in on the state of inter-bank funding.

According to the global currency strategist, one of the ironies of current market conditions is that Libor has risen despite the fact that Fed-ECB help has escalated already, in the shape of dollar liquidity support:

The Fed has renewed swap lines to provide foreign central banks dollars that they in turn can auction to their members.  The problem is that banks are not  taking advantage of this source of funding.  The most compelling reason seems to be that the punitivive price the central bank want is too much.  It is more than double the price that banks can secure funding in the market.

…Talk in the market suggests the ECB may cut the punitive rate and make dollar funding cheaper. This of course has yet to be seen. Many market participants do not think that this disruption and potential risk to the economic recovery as well as a new banking crisis (as well as impacting trade finance) can go unanswered by officials.

Fed funds remain at the upper end of their 0-25 bp range. There is some speculation that the Fed may also become more generous with its liquidity provisions.

Perhaps the time has indeed come for (another) Plan B, then.

Related links: Key interest rates – European Central Bank Those Libor laments in context – FT Alphaville Eurozone banks sip at the ECB’s dollar swap facility- FT Alphaville

This entry was posted by Joseph Cotterill on Tuesday, May 25th, 2010 at 16:13 and is filed under Capital markets. Tagged with Central bank intervention, ecb, federal reserve, Libor, liquidity, refinancing rate. Edit this entry.

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