RBA pumps in another $2.11b to ease money squeeze

October 17, 2008

Australia's central bank added $2.11 billion to the financial system, seeking to ease funding costs as banks hoard cash due to the global credit squeeze.

The Reserve Bank of Australia added funds through so-called repurchase agreements after estimating money markets would have a deficit of $1.94 billion today. Australian banks increased deposits held at the RBA by $1.01 billion to $10.826 billion yesterday, after those holdings reached a record $11.04 billion on Sept. 30, the RBA said today on its Web site.

Australian banks' borrowing costs fell today, according to a gauge that measures the availability of funds. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 73.08 basis points at 10:22 a.m. in Sydney, heading for the narrowest closing level since Oct. 2, from 78.50 yesterday. The gap has averaged 47.5 points this year. A basis point is 0.01 percentage point.

Interbank lending rates have jumped as banks hoarded cash after Lehman Brothers Holdings Inc. went bankrupt last month. Funding costs eased this week after Prime Minister Kevin Rudd guaranteed bank deposits and European central banks offered unlimited US currency, seeking to unlock frozen credit markets.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 5 basis points to 4.50% yesterday, according to the British Bankers' Association. It was its fourth straight decline, the longest sequence since June.

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

In repurchase agreements, or repos, central banks typically buy debt securities for a set period, temporarily raising the amount of money available in the banking system.

Repos help maintain enough money to keep overnight interest rates close to the central bank's target. They don't signal a policy shift. RBA Governor Glenn Stevens lowered the benchmark cash target rate to 6% from 7% on Oct. 7.

Bloomberg News