ECB set to pump cash into money markets

Fresh emergency action to pump funds into the money markets was announced on Friday night by the European Central Bank amid renewed fears that liquidity in the credit markets is again starting to dry up.

On Friday night, the bank said it would inject an unspecified amount of extra liquidity next week, noting “re-emerging tensions” – and would do so until at least the end of the year.

Earlier, Jean-Claude Trichet, ECB president, had pledged continuing action to keep short-term money market interest rates in line with its main policy rate.

The new promise of intervention came as three-month US interbank rates rose for the eighth day in a row to 5.04 per cent, more than half a point higher than the US Fed Funds target rate of 4.5 per cent.

Three-month money usually trades just above the Fed Funds rate which is 4.5 per cent. Europe and UK money markets are showing similar strains.

Continuing problems in the markets were highlighted again on Friday as key interest-rate indicators hit fresh highs while the dollar plumbed new lows against the euro, falling to a record low of $1.4966.

The credit squeeze is also showing signs of dragging down eurozone economic growth, according to a closely watched survey published on Friday.

Service business growth in the 13-country eurozone slumped to the weakest level for more than two years, according to November’s purchasing managers’ indices, almost certainly because of financial sector weakness.

The eurozone’s services sector slowdown was “particularly relevant as it has been the engine of growth of the euro area on the past two years”, said Jacques Cailloux, economist at Royal Bank of Scotland, which releases the survey with NTC Economics.

The latest data will knock European policymakers’ confidence that the eurozone can remain relatively immune from the US subprime mortgage crisis, although few economists expect a serious slump.

Mr Trichet hinted that he expected financial turmoil to result in structural changes, saying banks’ losses “may trigger a reassessment by some of them of the suitability of the so-called originate-and-distribute business model”, which relies heavily on loan securitisation.