The central banks of Britain and Switzerland added extra funds to ease pressure on high interbank lending rates on Thursday, while the European Central Bank said it was ready to step in with extra cash as needed.
The reassuring moves from Europe's three largest central banks helped boost European stocks, following a steady rise in money market lending rates as the end of the quarter nears.
"The ECB continues to closely monitor liquidity conditions and notes tensions in short-term rates as the end-of-quarter approaches, notwithstanding the ample liquidity conditions," the ECB said.
"The ECB stands ready to provide additional liquidity if needed."
The Bank of England lent 13.62 billion pounds ($27.33 billion) at its regular one-week money market operation, up from 10.93 billion pounds the previous week.
Banks bid for almost three times that much, demonstrating the demand for ready cash.
The Swiss National Bank offered three-month funds at 2.20 percent in a move seen as an attempt to ease money market tensions due to fear of future losses in the banking sector.
German banking giant Deutsche Bank AG has issued a veiled profit warning due to the credit crisis and Switzerland's UBS AG and Credit Suisse AG are expected to announce further losses next week.
Nonetheless, money market rates continued to climb. London interbank rates rose with LIBOR three-month sterling funds edging above 6 percent, their highest since late December, while overnight dollar LIBOR rates jumped to 3.07750 percent, a 10-day high.
"It seems to be the same old story. There's a scramble for cash at the moment," a money market trader in Dublin said. Traders and analysts said extra liquidity would be welcomed given fresh tensions on markets which have pushed short-term interbank lending rates up to their highest level this year.
"It's not surprising. Just continuing efforts on the part of central banks to shore up liquidity in the money markets. The need for liquidity is becoming particularly acute into month-end, quarter-end," said Richard McGuire, fixed income strategist at RBC Capital Markets.
ECB Governing Council member Guy Quaden said money market tensions were due to lack of confidence among financial institutions. He called for full disclosure from banks.
Central Bank Money in Demand
European banks have rushed to borrow from central banks over the last week amid renewed concerns about the impact of financial market turbulence, exacerbated by the upcoming end-of-quarter period when many have obligations to meet.
The ECB loaned banks an extra 15 billion euros to tide them over the Easter holiday period and topped up lending at its last weekly auction by 50 billion, although its generosity has failed to have much impact on short-term market rates.
At 1140 GMT, the bid/ask spread on overnight euros was 4.10/4.18 percent, according to Reuters data, above the ECB's 4 percent benchmark. Benchmark overnight EONIA rates fixed at 4.187 percent on Wednesday and three-month interbank rates hit three-month highs in euros and sterling.
The Euribor rate for three-month unsecured lending in euros rose to 4.728 percent, widening the margin over equivalent risk-free rates, although it remains short of the seven-year highs above 4.9 percent seen in mid-December.
"There's been pressure in the market all week. Even with extra liquidity the ECB put in at the 1-week tender, there's still pressure out there," the Dublin-based trader said.
The ECB, the BoE, the SNB and the U.S. Federal Reserve announced a second round of coordinated liquidity injections earlier this month, following action in December which succeeded in calming money markets around the turn of the year.
Euro zone banks have shown strong appetite for central bank funds in recent days, bidding the lowest rate for three-month money up to 4.44 percent, the highest since November, and the rate at the ECB's last weekly tender up to a six-month high.
Tenders for U.S. dollar funds by the ECB and the SNB earlier this week, part of the latest round of coordinated global liquidity injections, were also massively oversubscribed.