By Jennifer Ryan and Garfield Reynolds
Oct. 7 (Bloomberg) -- Australia slashed its benchmark interest rate by the most since 1992 and central banks pumped more than $480 billion into money markets as policy makers tried to staunch the worsening financial crisis.
Australia's central bank lowered its key rate by one percentage point to 6 percent, twice as much as economists forecast. The European Central Bank and its counterparts provided extra funds one day after the worldwide stock market slide wiped more than $2 trillion off investors' wealth.
The moves failed to stem strains in credit markets that have pushed Iceland's financial system close to collapse and sent European money-market rates to records today. With financial conditions deteriorating, central banks are coming under pressure to follow Australia and cut interest rates.
``There seems a growing chance of emergency ECB and Bank of England easing in the next few days,'' said Michael Saunders, chief western European economist at Citigroup Inc. ``To be sure, early easing, even 50 basis points or more, would not provide a full solution to the current economic and financial crisis.''
ECB President Jean-Claude Trichet is scheduled to speak in Evian, France at 3:30 p.m. local time today. Fed Chairman Ben S. Bernanke will discuss the economic outlook from 12:30 p.m. in Washington. They will meet Group of Seven counterparts in the U.S. capital on Oct. 10.
ECB Loans
The ECB today loaned banks 250 billion euros ($339 billion) in seven-day funds, six times more than it initially estimated would be needed. It also lent banks $50 billion for one day at a marginal rate of 6.75 percent, more than three times the Federal Reserve's 2 percent benchmark interest rate.
The Australian rate cut triggered a rebound in Asian stocks on speculation other countries will follow to unlock credit markets. The MSCI Asia Pacific Index pared a 3.2 percent loss and ended the day 1.2 percent lower.
``Rumors are now circulating that today's aggressive move by the Reserve Bank of Australia is the precursor for coordinated rate cuts by global central banks,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne.
So far, some central banks have been reluctant to move as fast as the Fed in lowering borrowing costs. Indonesia's central bank today raised its policy rate to slow inflation and boost the rupiah. The ECB in July increased its benchmark rate to 4.25 percent and the Bank of England has left its key rate at 5 percent since April. The Fed by contrast has slashed its benchmark by 3.25 percentage points to 2 percent.
Credit Squeeze
As the credit squeeze worsens and spills over into Europe's economy, its central banks may nevertheless have to act. Trichet said Oct. 2 that the ECB considered easing policy last week. The Bank of England will cut its benchmark rate by at least quarter point on Oct. 9, according to 48 of 61 economists in a Bloomberg News survey.
The concern for governments and central banks is that their measures have so far failed to contain the financial crisis.
The London interbank offered rate, or Libor, for overnight dollar loans rose to 3.94 percent from 2.37 percent. One-day rates for loans in pounds climbed to 5.84 percent from 5.08 percent. Earlier today the euro interbank offered rate, or Euribor, for three-month loans reached a record 5.38 percent.
``Despite central banks pumping liquidity into the system, banks are either hoarding cash or putting it into treasury bills,'' said Ong Hock Ann, a money-market dealer at ING Asia Private Bank Ltd. in Singapore. ``It's a question of confidence and trust. There is money, but money is not flowing to the right channels.''
Money Flow
Bernanke yesterday signaled he's preparing measures with Treasury Secretary Henry Paulson to unfreeze markets where loans aren't secured by assets. Russia may lend Iceland's central bank 4 billion euros ($5.43 billion) to inject liquidity into the financial system, the bank said today.
Financial institutions have incurred more than $585 billion in writedowns and credit-market losses since the collapse of the U.S. subprime mortgage market in early 2007. Governments in Europe and the U.S. arranged rescues for six financial institutions in the past two weeks.
The ECB also added $50 billion in overnight dollar funds. The Bank of England provided $25.9 billion in overnight and weekly money and 31 billion pounds ($54 billion) in three-month funds.
The Bank of Japan added 1 trillion yen ($9.8 billion) into money markets and the Reserve Bank of Australia provided A$1.82 billion ($1.3 billion) of funds. The Swiss National Bank today loaned $10 billion of overnight funds.
To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Garfield Reynolds in Sydney at greynolds1@bloomberg.net.
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