The European Central Bank (ECB) and Federal Reserve took the right steps to promote lending and restore confidence in money markets yesterday, Luxembourg's prime minister and finance minister Jean-Claude Jüncker said.
The co-ordinated action "is pointing in the right direction," Mr Jüncker, who heads the panel of finance ministers from the 13-nation euro zone, said in an interview. "I hope this really calms the financial markets."
Policy makers reacted to more than $66 billion (€45 billion) of losses announced by banks this year and estimates of about $300 billion more on securities linked to subprime mortgages, collateralised-debt obligations and structured investment vehicles.
"I'm satisfied with the action," Mr Jüncker said at a meeting of European centre-right politicians. He said he spoke to ECB president Jean-Claude Trichet by phone before the central banks made their move.
The cost to borrow for three months remained at 4.95 per cent today, according to the British Bankers' Association, suggesting the measures had little short-term impact.
European Commission president José Barroso said the economy is weathering the storm because the "fundamentals of the economy in Europe are good, are strong". He expressed confidence growth will continue next year.
"We should follow closely and monitor the evolution of developments in the financial markets, because it seems there are still causes for concern, but I would not over-dramatise the situation," Mr Barroso said.
US treasury notes fell after producer prices rose at the fastest rate in 34 years and retail sales increased twice as much as forecast. Ten-year notes extended the biggest drop in more than two months, posted yesterday after the Federal Reserve and four other central banks said they would take extra steps to inject cash into lending markets.
Interest rates on bank loans in euro held near a seven-year high, suggesting the measures haven't succeeded in spurring banks to lend to each other. Climbing inflation "is the fear the Fed has", said Brian Brennan, a portfolio manager who helps oversee $11 billion in fixed income at T Rowe Price Group in Baltimore. Policy makers are "trying to balance financial markets and liquidity versus the real economy". - (Bloomberg)
