The European Central Bank (ECB) signalled yesterday that its monetary policy would not be blown off course by the continuing credit turmoil, hinting it would increase its main interest rate again next month.
The bank said its monetary policy stance remained the same as set out on August 2nd by Jean-Claude Trichet, ECB president, who hinted strongly that its main interest rate would rise by a quarter percentage point to 4.25 per cent next month.
The statements came as the ECB helped to calm investors' fears by injecting more funds into the banking system and four of the biggest US banks lined up behind the Federal Reserve's efforts to ease the liquidity crunch.
Global equities rallied while safe-haven government bonds continued a dramatic sell-off after the ECB announced it would add an extra €40 billion into the three-month money market, where interest rates have shot higher during the recent financial turmoil.
The move was followed by news that four big US banks - Citigroup, JPMorganChase, Bank of America and Wachovia - had each borrowed $500 million (€369 million) from the Fed under new terms offered on Friday. The banks said the funds would be directed towards clients.
The banks were keen to point out that the move was largely symbolic.
"While JPMorgan, BofA, and Wachovia each have substantial liquidity and the capacity to borrow money elsewhere on more favourable terms, the companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and encourage its use by other financial institutions," they said in a joint statement.
Separately, Citigroup said it was "pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients".
On equity markets, European shares jumped by 1.6 per cent while Asian shares showed strong gains, except for Tokyo which steadied. By midday on Wall Street, the S&P 500 index was up 0.36 per cent.
The Irish market rose for a fourth day, slightly underperforming its European peers, but nevertheless managing to claw back some €1.5 billion in value.
The second liners were for once the best performers, with building materials groups Grafton and Kingspan putting in particularly good showings.
They ended the day up 4.3 per cent and 4.9 per cent respectively, at €9.80 and €16.57.
The financials were also gainers, with a decent performance from Anglo, the busiest of the banks.
Its shares added 2.2 per cent, to close at €14, while AIB and Bank of Ireland both added less than 1 per cent.
The index is still down almost 12 per cent this year.
The ECB's action yesterday followed extensive talks with big finance houses and appeared aimed at alleviating difficulties faced by banks while not allowing its monetary policy to be distracted.
