The European Central Bank (ECB) will take extra steps to ease liquidity tensions around the end of the year after a scramble for cash pushed euro money market rates to fresh highs.
The ECB announced today it would extend the length of its regular weekly tender loans on December 19th to two weeks to cover banks' liquidity needs around the end of the year, effectively doubling up with the weekly refinancing operation scheduled to cover the New Year period.
Money market traders said market rates eased after the ECB's statement, which followed a jump in one-month market rates to above 4.8 per cent, well over the bank's 4 per cent policy rate and the highest since early 2001.
The money market liquidity crunch, which was first triggered in August by defaults on US mortgages, has intensified again as banks pay a higher premium for cash to cope with the seasonal strains on liquidity during the Christmas and New Year period - typically the time banks close their books.
Liquidity has been thin generally since August as banks hoard cash as a contingency against credit-related losses and uncertainty lingers over their exposure to credit markets.
The ECB said it was aware of money market tensions relating to funding during the year-end period, and that it was monitoring market conditions with the aim of keeping short-term market rates close to its benchmark rate.