Six central banks agree huge new liquidity drive

Six of the world’s biggest central banks are to lower the cost of dollar funding for their banks in a huge coordinated action to increase the supply of money into economies.

The Bank of England joins the central banks of Canada, Japan, Switzerland, the US Federal Reserve and the European Central Bank to offer banks cheaper funding as their lending to each other has dropped in the tougher market conditions.

The banks will lower the price of temporary US dollar liquidity swap arrangements by 50 basis points from 5 December to 1 February next year.

The central banks have also agreed to grant each other temporary bilateral liquidity swap arrangements to enable them to provide their banks with any liquidity needed in any of their currencies, again until February 2013.

The Bank of England said there was currently no need for such lines of liquidity in multiple foreign currencies – but said “the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.”

It would mean the Bank of England could provide sterling to the five other central banks to help out their own institutions should their access to foreign currency dry up.

The news sent the FTSE 100 sharply higher, up 156.9 points or 2.9 per cent. In the US, Dow Jones industrial average futures gained 255 points, and Nasdaq 100 futures added 48.5 points.

The joint move is a sign of the escalating pressures on banks worldwide as they try to access affordable wholesale funding while slashing their balance sheets and cutting credit lines to banks they see as on a rocky financial footing.

The dollar swap liquidity price drop means the swap facilities will now be made at a new rate of the US dollar overnight index swap (OIS) rate plus 50 basis points.

"The joint action is designed to prompt an increase in lending, whilst at the same time reducing some of the strains under which credit lines are currently operating," said Richard Hunter, head of equities at Hargreaves Lansdown.

"If the institutions now accept this invitation as intended, a great deal of tension will be removed from the system both in terms of liquidity and market sentiment. The possibility of a Santa Claus rally is no longer off the agenda.”