By Marcus Leach

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today (Wednesday) announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system.

The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from 5 December 2011.

The authorization of these swap arrangements has been extended to 1 February 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.

At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but 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. The swap lines are available until 1 February 2013.

The introduction of the network of temporary swap lines will enable the Bank of England to provide sterling to the other central banks if required, as well as enabling the Bank of England to provide liquidity, should it be needed, in Japanese yen, euro, Swiss francs and Canadian dollars (in addition to the existing operations in U.S. dollars).

The Bank will continue its weekly tenders of U.S. dollar funding at fixed interest rates each Wednesday until further notice, with counterparties able to borrow unlimited amounts against eligible collateral. The rate at which tenders are conducted will be reduced to OIS+50bps (from OIS+100bps) beginning with the next weekly tender on 7 December. The three-month tender scheduled for 7 December and subsequent three-month tenders will also be conducted at OIS+50bps.

“Rumours have been circulating in the market for a couple of weeks that a coordinated response from central banks to unjam funding markets was possible, and here it is," Jeremy Cook, chief economist at foreign exchange company, World First, said.

“Cutting swap costs is the equivalent of interest rate cuts. These banks are now basically providing unlimited US dollars to banks with which to fund themselves. The banks will be hoping this is a turning point in the crisis.

“We do not know what caused this decision, we may never know, but the smart money is on the fact that yields on 1yr German debt went negative this morning (paying Germany to lend it money).

“This may have been a signal that the money markets were a short shove away from complete collapse.

“Clearly the world’s central bankers have had enough of all the political mud-slinging and intransigence and they’ve decided to take the situation by the scruff of the neck. This could be a critical moment for the global economy…”

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