Asia Funding Costs Decline as Central Banks Ready Rate Cuts

By Garfield Reynolds and Bob Chen

Nov. 13 (Bloomberg) -- Money market rates extended declines in Asia on speculation central banks from Europe to Australia will keep cutting borrowing costs to revive economic growth.

Singapore's three-month interbank rate for U.S. dollar loans, or Sibor, fell 3.5 basis points to 2.12 percent, the lowest since Oct. 25, 2004. The rate Australian banks charge each other for three-month loans fell 8 basis points to 4.75 percent, the 10th straight drop.

``The pressures should be lower over the next several months,'' said David Cohen, director of Asian forecasting at Action Economics in Singapore. ``Central banks everywhere will be easing further.''

Interbank rates fell from last month's peaks as central banks provided unlimited dollar funding and governments offered bailouts and guarantees to financial institutions. Credit markets froze after Lehman filed for bankruptcy on Sept. 15, shattering lenders' confidence they would be repaid.

The difference between Australia's three-month loan rate and the overnight indexed swap rate, a measure of funding availability, declined 0.6 basis point to 40.7 basis points, the smallest gap since Sept. 12, the last working day before Lehman Brothers Holdings Inc. collapsed.

Liquidity Pump

Australia's central bank intervened in the market ``for liquidity purposes,'' a spokesman said, as the nation's currency slid to a two-week low on falling equities and commodities prices. The RBA last bought its own currency for three days from Oct. 24 as it traded near a five-year low against the dollar.

``The trillions of dollars pumped in by central banks and governments are working,'' said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. ``The indications are that the worst of the credit crunch is over.''

Bank of England Governor Mervyn King said yesterday the central bank will reduce interest rates as needed to prevent a recession from fueling deflation. Bank of Canada Senior Deputy Governor Paul Jenkins said policy makers will probably cut rates again amid ``major shocks'' including a global credit crisis.

The cost of borrowing euros in London for three months fell yesterday to the lowest level in more than 12 months. The London interbank offered rate, or Libor, for euros fell 5 basis points to 4.27 percent, the lowest level since Aug. 1, 2007, British Bankers' Association data showed. That's 102 basis points above the European Central Bank's interest rate, compared with 40 basis points more on Aug. 9, 2007, when BNP Paribas SA halted withdrawals on three funds, sparking the crisis.

Still Not Functioning

Three-month dollar Libor slid 4 basis points to 2.13 percent, the lowest level since Oct. 27, 2004. That's still 113 basis points more than the Federal Reserve's target rate for overnight bank loans. The average is 16 basis points in the seven years to August 2007.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the BBA before noon in London.

``The money market is still not functioning properly and banks are not willing to lend to each other,'' ECB Executive Board member Lorenzo Bini Smaghi said Nov. 11. ``The rates that banks charge each other are still too high.''

Hong Kong's three-month interbank offered rate, or Hibor, the benchmark for what Hong Kong banks charge each other for such loans, rose for the first time this month. The rate advanced to 2.14 percent at the 11:15 a.m. fixing today, from 2.04 percent yesterday, a five-month low.

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.netBob Chen in Hong Kong at bchen45@bloomberg.net;