Central bankers deserve a Christmas too.
The Bank of England said on Thursday that it would hold a five-week cash auction on Dec 6, delivering £10bn at 5.75 per cent into the money market to help ease funding difficulties.
The move, say the economists at Investec, is unusual and is designed to address the rapid drying up of liquidity currently seen in the markets, with three-month libor hitting levels not seen since the height of the run on Northern Rock. Open market operations usually offer funds at just one-week’s duration.
In addition, the Bank of England will allow banks’ reserves to fluctuate by plus or minus 30 per cent without penalty during the constrained festive period. The leeway that banks were given was increased dramatically, to a maximum of 60 per cent in September, during the crisis-strewn summer, and has yet to fall back below 30 per cent. The increased flexibility, perhaps ironically, allows super-cautious banks to hold onto liquidity for longer.
The Bank maintains that this is all part of its “normal money market framework” – and in a sense it is. What the five-week repo doesn’t do is add liquidity to the system. The bank said:
The size of the Bank’s routine weekly repo OMOs during the maintenance period will be correspondingly lower.
So the longer-dated cash to help service the armies of Christmas shoppers on the streets will be recouped in the form of smaller sums on offer elsewhere. As such, the move may not be sufficient to thaw the current freeze in the interbank market.
The five-week window takes us through to Jan 10 though, through the staff-scarce Christmas-New Year period. Perhaps those toiling away at Threadneedle St are hoping that this might help secure a slightly more restful ride between Christmas and 2008?