The squeeze on liquidity has taken a new and worrying twist.
That’s the conclusion to be drawn from the Bank of England’s move on Monday to hold exceptional fine-tuning open market operations, offering £5bn of three-day money to tide banks over until the regular OMO is held on Thursday.
Stg 5 bn is equivalent to 25% of reserves targets. The range around reserves targets within which reserves are remunerated remains unchanged at +/-30%. The Bank will keep the range under review.
This action is being taken in response to conditions in the short-term money markets this morning. The Bank will take actions to ensure that the overnight rate is close to Bank Rate. Along with other central banks the Bank of England is closely monitoring market conditions.
While term money - from three months to one year - was severely squeezed at times last year, overnight liquidity generally remained plentiful, explains Philip Shaw, economist at Investec. This substantial exceptional fine tune is the first of its kind since September. If anything, he adds, the Bank’s move has been greeted with disappointment in the interbank markets. The sense is, large as it is, it won’t prove sufficient.
In which case, all eyes on the overnight Libor fix at sometime before midday Monday.
The Bear effect has also seen dollar markets suffering from serious liquidity problems. Which suggests, says Shaw, that “the Fed is going to be even busier at the beginning of this week.”
Update - overnight Libor rises to 5.5875 per cent against Friday’s 5.31375 per cent.
Charles Dumas from Lombard Street Research thinks that the Bank of England’s latest move suggests it remains in broadly the same camp as the ECB, in providing liquidity to the financial system while not opting for near-term rates cuts. Cuts will come later as the UK economy meaningfully slows.
In contrast, he adds, the Fed is tackling the problem of excessive debt by devaluing without the accompanying deflation. In providing tremendous “feather bedding” for firms in trouble, taking on the risk in the Bear/JPMorgan deal and in failing to really discipline the market, he describes the Fed’s position as “seriously askew.”
