Australian Funding Costs Rise on Year-End Demand, Slowing Cuts

By Candice Zachariahs

Dec. 4 (Bloomberg) -- Australian funding costs rose for a second day as banks’ end-of-year funding requirements increased and central banks in Australia and New Zealand signaled this week that they will slow the pace of rate cuts.

The difference between the rate Australian banks charge each other for three-month loans and the overnight swap rate, a measure of funding scarcity, rose five basis points to 65 basis points at 10:30 a.m. in Sydney. The measure, which rose to a one-month high of 81.5 basis points on Nov. 28, averaged 11 basis points in the five years to July 1, 2007.

“End of year you’re always going to see a strong demand for cash and that’s helping to keep yields up,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “It’s a seasonal thing and they will come back down once we head into the new year.”

Governor Alan Bollard today lowered New Zealand’s benchmark interest rate by a record 1.5 percentage points to 5 percent and said the cut “takes monetary policy to an expansionary position.” The European Central Bank, Bank of England and Sweden’s Riksbank are expected to announce interest-rate reductions later today. The Reserve Bank of Australia reduced its cash rate one percentage point to 4.25 percent on Dec. 2.

The rate Australian banks charge each other for three-month loans increased five basis points to 4.58 percent. The London interbank offered rate, or Libor, for one-month dollar loans stayed near a four-week high yesterday. The cost of borrowing in dollars for one month fell one basis point to 1.89 percent, the British Bankers’ Association said.

Libor Drops

Three-month libor declined for a second day yesterday, falling one basis point to 2.20 percent. Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the BBA before noon each day in London. The Libor-OIS spread, a gauge of cash scarcity, narrowed.

Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15, spurring governments and central banks around the world to bail out financial institutions and pump cash into money markets.

The Reserve Bank of Australia pumped A$590 million ($382 million) into the financial system today after estimating the shortfall would be A$983 million. Banks held A$3.53 billion in deposits at the RBA yesterday, the central bank said today on its Web site.

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