Central banks boost anti-crisis moves

Wim Duisenberg: Reluctant to slash interest rates

Central banks around the world have stepped up their efforts to minimise the economic and financial-market fallout from the US attacks.

The European Central Bank brushed off calls to lower eurozone interest rates, but repeated that it was ready to join in a concerted move to stabilise global financial markets.

At the same time, in an unusual move, the US Federal Reserve said it was making $50bn available to support the European banking system.

The Fed offer was the largest in a number of multi-billion dollar cash boosts offered by central banks over the last two days.

Many observers feared that the turmoil which beset financial markets after Tuesday's terrorist attacks on the US would have a knock-on effect on the health of the financial system.

If bank lending were to dry up, international policy-makers fear it could push the already vulnerable global economy into recession.

ECB remains confident

The ECB rate decision came as little surprise, since the bank has long dismissed calls for knee-jerk monetary reactions.

The bank left its main interest rate unchanged, at 4.25%.

But the expectation remains that central banks, especially the Fed, will progressively cut rates, in the hope of providing some stimulus to economic growth.

In a statement after the rate decision, the ECB said it had been in contact with the Fed, and that it remained confident that the US economy would prove resilient.

In light of the US attacks, there have been persistent rumours that such moves could be co-ordinated between central banks around the world.

On Wednesday, finance ministers from the G7 group of industrialised nations issued a communique, in which they said they would "monitor economic developments and financial markets closely and stand ready to take further action as necessary".

The G7 last co-ordinated a concerted intervention in the financial markets almost exactly a year ago, then in the hope of stemming the euro's slump against the dollar.

Transatlantic swap

The Fed's move is more unusual: in normal circumstances, central banks are only charged with monitoring developments in their own economy.

The US Fed is reaching out to Europe

It is not a straight loan from the US to Europe, but a complex swap arrangement, calculated to ensure that currency market transactions are able to be completed on both sides of the Atlantic.

"Under the agreement, the ECB would be eligible to draw up to $50bn, receiving dollar deposits at the Federal Reserve Bank of New York," the Fed said in a short statement.

"In exchange, the Federal Reserve Bank of New York will receive euro deposits of an equivalent amount at the ECB."

Over the next 30 days, the ECB will make these dollar deposits available to national central banks around Europe.

Central banks will use the dollars to help meet the cash needs of domestic banks, which may have suffered disruption to their US-related business activities.

The Fed, the ECB and a host of other central banks around the world have already made cheap emergency funds available to their banking systems, but this is the first time that two banks have co-operated across national borders.

Including the Fed-ECB agreement, central banks have now pumped more than $190bn into markets in the past two days to help restore calm.

Longer-term thinking

As the economic consequences of the attacks are still unclear, there is little indication of what further measures will be needed in the longer term.

Masajuro Shiokawa: Japan may intervene

There is talk of intervention in the foreign exchange markets, in order to prevent damaging volatility in the value of the dollar.

Mr Duisenberg has said that he was prepared for currency intervention, echoing an earlier pledge from Japanese finance minister Masajuro Shiokawa.

In the past, market intervention and other confidence-boosting measures have only tended to work when they are in concert.

Disruption

This time, however, the attacks have already disrupted the mechanisms under which such co-operation is usually arranged.

The annual meetings of the International Monetary Fund and World Bank, together with a meeting of the G7 at the end of this month, are likely to be rescheduled.

The Bank for International Settlements, the organisation that co-ordinates central banks around the world, has said that a meeting of central bank governors in the immediate future could prove impracticable.