Asian Money Costs Fall as Central Banks Lower Interest Rates

By Lilian Karunungan

Nov. 5 (Bloomberg) -- Money-market rates in Asia fell as interest-rate cuts by central banks and as much as $3 trillion in emergency funding from governments improved confidence in credit markets.

Hong Kong's three-month interbank offered rate, or Hibor, dropped 24 basis points to a seven-week low of 2.55 percent. The rate for U.S. dollar loans in Singapore, or Sibor, slid to 2.57 percent, the lowest since March 18.

``The liquidity situation is slowly being rectified,'' said Emmanuel Ng, an economist at Oversea-Chinese Banking Corp., Singapore's third-largest bank. ``This is probably not the end of the bad news. The bigger picture is that the global slowdown story will begin to take precedence even if the liquidity situation is normalized.''

Borrowing costs tumbled worldwide as central banks slashed interest rates and governments offered bailouts and guarantees to kick start lending. Australia's central bank cut its overnight cash target a larger-than-expected 75 basis points to 5.25 percent yesterday, joining policy makers in China, Hong Kong, India, Japan and the U.S. in lowering the price of money in the past week.

Bank of Korea and Bank Indonesia will announce monetary policy reviews in the next two days.

Gradual Return

The difference between the rate Australia's banks charge each other for three-month loans and the overnight indexed swap rate, a measure of funding availability, dropped to 49.2 basis points, the narrowest since Sept. 12, the last working day before Lehman Brothers Holdings Inc. filed for bankruptcy. A basis point is 0.01 percentage point.

Asian stocks gained, lifting the benchmark index to a three- week high, as Barack Obama was elected the 44th president of the U.S. That followed the U.S.'s biggest presidential election day rally in 24 years, which saw financial shares surging after London interbank rates extended declines.

``The cost of borrowing U.S. dollars in the interbank market fell again overnight as money markets continued their gradual return to normality,'' Citigroup Inc.'s Sydney-based analysts wrote today in a note to clients.

Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars. Borrowing among banks, essential to keep financial markets working, froze after Lehman Brothers filed for bankruptcy Sept. 15, shattering lenders' confidence they would be repaid.

Libor Sliding

The London interbank offered rate, or Libor, for three-month U.S. dollar loans, slid 15 basis points yesterday to 2.71 percent, the lowest level since June 9.

The rate is still 171 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007. About 85 percent of U.S. banks tightened lending standards on loans to large and mid- size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991.

``Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon,'' said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm.

The Libor-OIS spread, a gauge of cash scarcity among banks, narrowed 13 basis points to 211 basis points yesterday. That compares with 87 basis points on Sept. 12.

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.

Rate Cuts Loom

The European Central Bank and Bank of England will cut their key rates by 50 basis points tomorrow, according to Bloomberg News surveys of economists. Three-month dollar Libor slid for a 17th consecutive day today, according to the British Bankers' Association. The rate was at 4.82 percent on Oct. 10, the day before the streak began.

In the U.S., interest rates on the highest-ranked 30-day commercial paper slid 27 basis points to 1.74 percent, the lowest level since September 2004, according to yields offered by companies and compiled by Bloomberg. Yields on 90-day paper fell 6 basis points to a three-month low of 2.62 percent.

The Fed set the rate it's willing to accept for 90-day commercial paper at 2.6 percent, down 1 basis point, including a 1 percentage point unsecured credit surcharge.

The Reserve Bank of Australia pumped A$1.59 billion ($1.11 billion) into money markets today. The central bank had estimated the system would have a deficit of A$2.1 billion, according to the Sydney-based RBA's Web site. The rate Australian banks charge each other for three-month loans fell 8 basis points to 5.54 percent.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net