Interbank rate up on record cash stockpiles

October 21, 2008

Australian banks' borrowing costs rose to the highest in almost a week after financial institutions increased deposits at the central bank to a record.

The rate banks charge each other for three-month loans rose to 5.87%, the highest since October 15.

The difference between that rate and the overnight indexed swap rate, a measure of funding availability, rose the most since October 10 to 76.25 basis points in Sydney this morning.

Banks' deposits at the Reserve Bank of Australia grew to $11.2 billion yesterday, up by $306 million.

The RBA pumped $5.1 billion into the financial system today, the most since July 22, after estimating there would be a deficit of $7.82 billion, the biggest gap since at least 2003.

Interbank lending rates declined last week after soaring in September as banks hoarded cash after Lehman Brothers went bankrupt.

Funding costs eased after European central banks offered unlimited US currency and Prime Minister Kevin Rudd guaranteed bank deposits, seeking to unlock frozen credit markets.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars, slid 36 basis points yesterday to 4.06%, the biggest drop in nine months, according to the British Bankers' Association.

The overnight rate declined 16 basis points to 1.51%, the lowest in more than four years. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks.

Banks hold money in exchange settlement accounts, on-call deposits at the Reserve Bank that receive interest at 0.25 percentage point below the central bank's benchmark rate.

RBA governor Glenn Stevens lowered the cash target rate to 6% on October 7.

The Bank of England and the European Central Bank reduced benchmark rates by 0.5 percentage point on October 8 in a coordinated cut with central banks including the Federal Reserve.

Bloomberg