The Federal Reserve, European Central Bank and four other central banks unveiled a coordinated action to provide liquidity to “ease strains in financial markets.” The central banks agreed to lower the pricing on existing so-called dollar liquidity swap arrangements by 50 basis points. As a contingency measure, they also plan on establishing “bilateral liquidity swap arrangements.”
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the U.S. Federal Reserve said in a statement.
U.S. stock futures and European stock indexes jumped on the news, and the euro rallied against the dollar.
The Fed, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points. That takes the new rate down to the U.S. dollar overnight index swap, or OIS, rate plus 50 basis points, the Fed said.
The pricing will be applied to all operations conducted from Dec. 5. The authorization of these swap arrangements has been extended to Feb. 1, 2013.
The central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant, according to the Fed. “At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,” the Fed said.