Central banks release $100bn into money markets to ease credit crisis

By Edmund Conway, Economics Editor

Last Updated: 2:18am GMT 13/12/2007

The world's central banks have joined forces for the first time since the September 11 terrorist attacks in bid to ease the financial crisis that has gripped markets.

Expert reaction to the emergency action

FTSE 100 takes little comfort from the action

Tom Stevenson: Why the banks have been pushed to these desperate moves

The Federal Reserve, the Bank of England and the European Central Bank, along with central banks in Canada and Switzerland, will together make around $100bn available to markets that have been clamouring for cheaper money since July.

	The run on Northern Rock: the UK's biggest casualty of the credit crisis

The Fed, which only last night cut interest rates, plans to make $40bn available to banks over the next two months. In Europe, the ECB and the Swiss National Bank are prepared to pump as much as $24bn into the markets.

The move comes amid growing concern for the fate of the money markets and stock markets in London and New York, after interest rate cuts by the Fed and the Bank's Monetary Policy Committee failed to improve the increasingly negative mood.

The Bank said it planned to raise the amount of money it is offering to City banks in the money markets from £2.85bn to £11.35bn ($23bn), with the vast bulk of this cash being reserved for the benchmark three-month money market, which is at the core of the crisis.

With contributions from the Canadian central bank, and the possibility of more funds from the Fed, the total injected could pass $100bn.

David Brown, an economist at Bear Stearns, said: "The move will be seen as constructive steps with central banks responding to the credit crunch to alleviate strains in the market.

"But it does not get away from the fact that banks will need to cut rates. It is complementary medicine to improve the situation."

Significantly, the Bank said it would accept a far wider range of collateral against the borrowing than previously, allowing banks to offer covered bonds and mortgage-backed securities in exchange for money.

The latest news and views on the credit crisis

Over in the US, the Fed said it planned to create a new "term auction facility", which would pump at least $40bn into markets at favourable terms in four separate auctions starting this week.

Chris Rupkey of Bank of Tokyo/Mitsubishi said: "This is exactly what the market was praying for yesterday to address the legitimate fears of a year end credit crunch."