The European Central Bank said today it will reinforce its refinancing operations at least until the end of the year to counter signs of re-emerging tensions in the money market.
The ECB's surprise announcement, which was similar to one it made when markets were first hit by the credit crunch in August, came after money market rates rose significantly today.
London interbank offered rates for two-month euro deposits rose to 6-1/2 year highs and three-month euro rates posted their biggest weekly rise since mid-August on persistent concerns over banks' year-end funding, aggravated by the general credit crunch.
The three-month eurozone interbank lending market has been one of the hardest hit by the credit crunch which was sparked by the US subprime mortgage crisis.
"We have seen the funding crisis push up shorter term rates recently and there is a perception that it's going to be more of an issue as we head to the year-end, with banks trying to square up their books," said Sean Maloney, fixed income strategist at Nomura.
"I think probably the remarks from the ECB are a means of just trying to reassure confidence in the market to ensure that there will be liquidity available from an official source if the market is not able to do it itself."