Banks increased the amount of cash they deposited with the European Central Bank overnight to a record even as tensions on global credit markets showed some signs of easing.
Banks on October 17th lodged €239.6 billion ($324 billion) in the ECB's overnight deposit facility at 3.25 per cent, up from €205 billion on the previous day.
They also borrowed €14 billion from the ECB at the emergency overnight marginal rate of 4.25 per cent, up from €13 billion.
The cost of borrowing dollars in London fell last week for the first week since July after the ECB offered lenders as many euros as they wanted and joined counterparts in promising unlimited dollars as well.
Central bankers and governments have stepped up efforts to end the 14-month-old credit crunch that's threatening to tip the global economy into recession.
"The world economy looks to have become frozen in the headlights of the credit crunch,'' said Steven Barrow, head of G-10 research at Standard Bank in London in an e-mailed note.
"Policy rates will have to be slashed'' around the globe. The ECB earlier this month cut its key rate for the first time since 2003 by 50 basis points to 3.75 per cent and loosened rules on the collateral it will accept from banks when making loans. In the US, the Federal Reserve's main lending rate is at 1.50 per cent and the Bank of England's is at 4.5 per cent.
Still, while ECB President Jean-Claude Trichet told French radio RTL late yesterday that the banking system is "on the path to normalization," ECB Executive Board member Juergen Stark said in an interview on Germany's Deutschlandradio that it will take a "long time" for confidence to return to the banking sector.
The cost of borrowing in dollars for three months in London may decline about 27 basis points to 4.15 per cent today, according to David Buik, a market analyst at BGC Partners Inc. The British Bankers' Association will announce today's London interbank offered rate before noon.
Bloomberg