Major Central Banks Including Fed and ECB Cooperate on Dollar Liquidity... Swap Rate Cut (Comprehensive)

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Central banks of the United States, Europe, Japan, Canada, the United Kingdom, and Switzerland have jointly responded by lowering dollar swap rates and other measures to supply global dollar liquidity as financial markets were severely shaken by the spread of the novel coronavirus infection (COVID-19).

On the morning of the 16th (Korean time), six central banks?the U.S. Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BOJ), Bank of Canada (BOC), Bank of England (BOE), and Swiss National Bank (SNB)?decided to provide an additional 84-day maturity operation alongside the existing weekly swap operations.

Additionally, the central banks agreed to lower the dollar swap rate stipulated in their agreement by 25 basis points (bp) (1bp = 0.01 percentage points), stating that the new swap rate will be reduced to the level of the dollar overnight index swap (OIS) rate plus 25bp.

This measure aims to extend the dollar lending period and facilitate dollar lending to secure liquidity in the key currency, the dollar. Recently, the value of the dollar has surged as liquidity in the market has decreased. A shortage of dollar liquidity could exacerbate turmoil in global financial markets.

The central banks stated, "We will maintain the new pricing and maturity benefits for an appropriate period to ensure the smooth functioning of the dollar funding market." The ECB further explained that the swap lines serve as an important liquidity backstop to ease tensions in global funding markets, helping to alleviate pressure on credit supply to businesses and households.

Mark Carney, Governor of the BOE, and Andrew Bailey, the incoming Governor, also said in a separate statement, "This cooperation will complement the timely measures announced by the BOE last week and actions taken by central banks and governments worldwide," adding, "These measures can help prevent disruptions caused by economic shocks that are sharp and large but should be temporary."

This is not the first time the six central banks have cooperated. During major financial market disruptions such as the global financial crises in December 2007, October 2008, and November 2011, central banks jointly responded by expanding dollar supply. In 2007 and 2008, five countries excluding Japan simultaneously lowered their benchmark interest rates.

Meanwhile, on the same day, the Fed announced that it would cut its benchmark interest rate by 1 percentage point from 1.00%?1.25% to 0.00%?0.25% as of the 15th (local time). It also decided to purchase $700 billion worth of government bonds and mortgage-backed securities (MBS) to expand liquidity supply. Earlier, on the 3rd, the Fed had lowered the benchmark interest rate by 0.5 percentage points from 1.50%?1.75% to 1.00%?1.25%.

This content was produced with the assistance of AI translation services.