Investors reduced bets on interest rate increases by the European Central Bank and the Bank of England after a credit crunch forced central banks to provide emergency cash.
Investors see a 65 percent chance the ECB will raise interest rates in September, down from 90 percent on Aug. 8, futures trading shows. In the U.K., traders see an 88 percent chance of another rate increase this year after betting on the possibility of two more moves on Aug. 8.
The ECB and its counterparts around the world injected extra money into markets for a second day to assuage losses stemming from a U.S. real-estate slump. Traders' bets may reflect predictions that policy makers, who have downplayed the credit crunch in public by saying their focus is on inflation, will scale back plans to raise borrowing costs.
``It looks as if we have now reached the top of the interest rate cycle,'' said Eunan King, an economist at NCB Stockbrokers in Dublin. ``The ECB and the Bank of England may have to find a way to backtrack on their signaled rate hikes, unless the current turmoil in financial markets calms.''
The Frankfurt-based ECB today loaned 61 billion euros ($83.3 billion) after yesterday's 94.8 billion euros, which was the largest amount in a single so-called ``fine-tuning'' operation in the bank's nine-year history, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.
BOJ, Fed Follow
Other central banks followed. The BOJ added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. The Fed added $24 billion in temporary reserves yesterday, the most since April. Central banks in Canada, Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.
The Bank of England has yet to take any unusual measure to add liquidity to markets. The so-called London interbank offered rate banks charge each other for dollars climbed to 5.96 percent, the highest since January 2001, from 5.86 percent yesterday.
``People are more and more reluctant to lend money,'' said Gilles Moec, a senior economist at Bank of America in London. ``What we've seen shows that there was a liquidity squeeze in the system.''
BNP Paribas
BNP Paribas yesterday stopped investors withdrawing from funds with assets totaling 2 billion euros because it couldn't find prices to value their holdings after the sell-off in credit markets. Default rates on home loans to people with poor credit, known as subprime mortgages, are at a 10-year high and American Home Mortgage Investment Corp. this week became the second-biggest U.S. home lender to file for bankruptcy.
For now, policy makers around the world have refused to shift their emphasis from fighting inflation. Bank of England Governor Mervyn King said Aug. 8 he's optimistic turmoil in credit markets won't derail the economy or financial markets. ECB President Jean- Claude Trichet on Aug. 2 called it a ``period of nervousness'' with a process of ``normalization of the appreciation of risks.''
Australia's central bank on Aug. 8 raised its benchmark rate a quarter point to 6.25 percent, the highest in almost 11 years, and Governor Glenn Stevens said world financial ructions haven't ``significantly'' changed the economic outlook.
``I don't think this will change central bankers' views on where they want to take rates,'' said Gavin Redknap, an economist at Standard Chartered Bank in London.
Faster Growth
Faster economic growth in Europe, Japan and emerging markets including China may help offset a U.S. slowdown, the International Monetary Fund said July 25. The Washington-based fund expects the global economy to expand 5.2 percent this year and next instead of the 4.9 percent projected in April.
``Granted, we don't know what the long-term implications for the economy are,'' said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. ``But I would argue that in the short term they are quite limited.''
Trichet has already signaled the bank will raise rates further next month, calling for ``strong vigilance'' on inflation, language he used to flag all eight increases in the benchmark to a six-year high of 4 percent since late 2005.
Investors expect the ECB to keep its key rate unchanged beyond September, futures trading shows. The implied rate on the three-month Euribor contract for December settlement dropped to 4.33 percent today from 4.46 percent yesterday. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
U.K., Japan
In the U.K., the implied rate on the December interest-rate futures contract fell 10 basis points today to 6.09 percent, down from 6.23 percent two days ago. The Bank of England has raised its benchmark bank rate five times in the past year to 5.75 percent.
In Japan, policy makers may delay raising the 0.5 percent overnight rate, the lowest among major economies. Investors today saw a 36 percent chance of an increase at the Aug. 23 board meeting, according to Credit Suisse Group calculations based on the exchange of interest payments. That's down from 65 percent yesterday.
``For now, we need to stay calm and that's what central banks will do,'' said Standard Chartered's Redknap. ``At the most, they will delay their moves.''
Investors see a 65 percent chance the ECB will raise interest rates in September, down from 90 percent on Aug. 8, futures trading shows. In the U.K., traders see an 88 percent chance of another rate increase this year after betting on the possibility of two more moves on Aug. 8.
The ECB and its counterparts around the world injected extra money into markets for a second day to assuage losses stemming from a U.S. real-estate slump. Traders' bets may reflect predictions that policy makers, who have downplayed the credit crunch in public by saying their focus is on inflation, will scale back plans to raise borrowing costs.
``It looks as if we have now reached the top of the interest rate cycle,'' said Eunan King, an economist at NCB Stockbrokers in Dublin. ``The ECB and the Bank of England may have to find a way to backtrack on their signaled rate hikes, unless the current turmoil in financial markets calms.''
The Frankfurt-based ECB today loaned 61 billion euros ($83.3 billion) after yesterday's 94.8 billion euros, which was the largest amount in a single so-called ``fine-tuning'' operation in the bank's nine-year history, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.
BOJ, Fed Follow
Other central banks followed. The BOJ added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. The Fed added $24 billion in temporary reserves yesterday, the most since April. Central banks in Canada, Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.
The Bank of England has yet to take any unusual measure to add liquidity to markets. The so-called London interbank offered rate banks charge each other for dollars climbed to 5.96 percent, the highest since January 2001, from 5.86 percent yesterday.
``People are more and more reluctant to lend money,'' said Gilles Moec, a senior economist at Bank of America in London. ``What we've seen shows that there was a liquidity squeeze in the system.''
BNP Paribas
BNP Paribas yesterday stopped investors withdrawing from funds with assets totaling 2 billion euros because it couldn't find prices to value their holdings after the sell-off in credit markets. Default rates on home loans to people with poor credit, known as subprime mortgages, are at a 10-year high and American Home Mortgage Investment Corp. this week became the second-biggest U.S. home lender to file for bankruptcy.
For now, policy makers around the world have refused to shift their emphasis from fighting inflation. Bank of England Governor Mervyn King said Aug. 8 he's optimistic turmoil in credit markets won't derail the economy or financial markets. ECB President Jean- Claude Trichet on Aug. 2 called it a ``period of nervousness'' with a process of ``normalization of the appreciation of risks.''
Australia's central bank on Aug. 8 raised its benchmark rate a quarter point to 6.25 percent, the highest in almost 11 years, and Governor Glenn Stevens said world financial ructions haven't ``significantly'' changed the economic outlook.
``I don't think this will change central bankers' views on where they want to take rates,'' said Gavin Redknap, an economist at Standard Chartered Bank in London.
Faster Growth
Faster economic growth in Europe, Japan and emerging markets including China may help offset a U.S. slowdown, the International Monetary Fund said July 25. The Washington-based fund expects the global economy to expand 5.2 percent this year and next instead of the 4.9 percent projected in April.
``Granted, we don't know what the long-term implications for the economy are,'' said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. ``But I would argue that in the short term they are quite limited.''
Trichet has already signaled the bank will raise rates further next month, calling for ``strong vigilance'' on inflation, language he used to flag all eight increases in the benchmark to a six-year high of 4 percent since late 2005.
Investors expect the ECB to keep its key rate unchanged beyond September, futures trading shows. The implied rate on the three-month Euribor contract for December settlement dropped to 4.33 percent today from 4.46 percent yesterday. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
U.K., Japan
In the U.K., the implied rate on the December interest-rate futures contract fell 10 basis points today to 6.09 percent, down from 6.23 percent two days ago. The Bank of England has raised its benchmark bank rate five times in the past year to 5.75 percent.
In Japan, policy makers may delay raising the 0.5 percent overnight rate, the lowest among major economies. Investors today saw a 36 percent chance of an increase at the Aug. 23 board meeting, according to Credit Suisse Group calculations based on the exchange of interest payments. That's down from 65 percent yesterday.
``For now, we need to stay calm and that's what central banks will do,'' said Standard Chartered's Redknap. ``At the most, they will delay their moves.''
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