Australian Central Bank Adds A$2.79 Billion to Money System

By Candice Zachariahs

Oct. 16 (Bloomberg) -- Australia's central bank added A$2.79 billion ($1.83 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 A$1.82 billion today. Australian banks increased deposits held at the RBA by A$40 million to A$9.813 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site.

Australian banks' borrowing costs eased today, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 75.5 basis points, or 0.755 percentage point at 10:37 a.m. in Sydney, heading for the smallest since Oct. 2, from 95.50 yesterday. The gap has averaged 47 points this year.

Interbank lending rates have jumped as banks hoarded cash after Lehman Brothers Holdings Inc. went bankrupt last month. Funding eased this week after Australian Prime Minister Kevin Rudd guaranteed bank deposits and European leaders promised to shore up lenders, seeking to unlock frozen credit markets.

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped yesterday for a third day, its longest sequence of declines in seven weeks according to the British Bankers' Association. It slid 9 basis points to 4.55 percent.

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 cash target rate to 6 percent on Oct. 7.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net