Central banks in new credit move

The move reflects the fact money markets are still not working properly

Central banks will pump billions of extra dollars into the banking system to ease the continuing credit drought.

The co-ordinated move by the US Federal Reserve and the European Central Bank, is the latest effort to stimulate bank lending stymied by the credit crunch.

Extra billions will be auctioned to banks in Europe and the US once every two weeks for an indefinite period.

The measure would address "persistent liquidity pressures" in markets, the ECB said in a statement.

The latest liquidity boost will raise the amount of cash available in bi-weekly auctions by the Fed and ECB to $75bn and $25bn respectively.

Previously, Fed credit offers have totalled $50bn while the ECB's auctions have ranged in value from $10bn to $15bn.

Sustained action

In a separate move, the Fed has also agreed to extend an existing currency swap arrangement with the ECB and Swiss National Bank, providing an additional $26bn to European banks to help them pay down dollar-denominated debt.

Central banks have poured billions of dollars into the banking system this year to help alleviate the worst credit crisis in a generation.

But interbank lending rates remain high and institutions remain reluctant to lend to each other because of worries about exposure to losses from bad mortgage-backed investments.

The Fed has slashed the cost of borrowing this year in an attempt to prevent the housing and credit slumps from tipping the economy into recession.

Only this week, it cut benchmark rates by a further quarter point to 2% - the seventh cut since last September.

"Central banks have continued to work together and to consult regularly on liquidity conditions in financial markets," the Fed and ECB said in a joint statement.

"In view of the persistent liquidity pressures in some markets, the ECB, Fed and Swiss National Bank are announcing an expansion of their liquidity measures."

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