Can Central Banks encourage interbank lending?

Can Central Banks encourage interbank lending?

As the market expected the ECB tweaked deposit rates to encourage more interbank lending. The ECB cut the rate it pays to deposit overnight money and increased the rate it charges for emergency loans. The concern from the ECB is that whilst they have slashed their base rate at the fastest pace in the ECB’s 10 year history to 2.5% it may not be enough to stimulate the economy as long as banks are refusing to lend to each other. Banks globally have little confidence in one another and consequently are hording cash and tending to deposit with the Central Banks.

From 21st January the ECB’s deposit rate will drop to 100 basis points below the base rate and the marginal lending rate will be increased to 100 basis points above it. Euribor set yesterday at 3.13, the lowest level since July 2006 – but still 63 bp above the base rate; in the seven years to August 2007, before the credit crisis began, the gap averaged only 15bp.

Trichet said on15th December that there is a limit to how far the central bank can pare rates whilst yesterday Charles Bean (a UK MPC member) signalled that the UK could see rates reach 0%. This divergence in outlook is continuing to stoke the negative outlook for the sterling euro cross. No doubt Euro zone exporters are hurting as we look towards parity.

GBPEUR is currently trading at 1.0617 levels having rallied slightly from the record low seen at 5.20pm yesterday of 1.0456.

GBP was hammered again yesterday, it is currently trading arond 1.5030 level but looks set to test yesterday’s low of 1.49. This decline in Sterling from a peak of 2.0335 on 13th March to the year low seen on 4th December of 1.4680 represents a drop of 27.8%. This is the steepest yearly decline since the height of the Great Depression in 1931 when the pound was forced off the gold standard.

France’s manufacturing confidence fell to the lowest level in 15 years in December, adding to signs that Europe’s third largest economy may move into a recession for the first time since 1993.

Elsewhere, the Bank of Japan cut its benchmark interest rate to 0.1% (from 0.3%) in an effort to boost the economy. JPY saw a 13 year high yesterday against USD of 87.14 and is currently trading at levels of 88.55.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.