Reserve Bank of Australia Struggles to Curb Rising Rates

Australia's central bank on Friday provided the banking system with less money than its estimated need, as it struggled to ease upward pressure on some market interest rates.

In its regular daily money market operation, the Reserve Bank of Australia (RBA) added a total A$2.491 billion (US$2.03 billion) in cash, down from Thursday's hefty A$3.157 billion.

The addition was less than the market's estimated cash need of A$2.616 billion, implying that commercial banks' cash balances with the central bank would ease slightly.

Renewed trouble in the global commercial paper market has made institutions everywhere reluctant to lend, pushing up market interest rates.

Three-month Australian bank bill rates climbed to a fresh peak of 6.88/90 percent, from Thursday's 6.86/88 percent, putting it unusually far above the RBA's 6.5% cash rate.

Trying to ease some of that pressure, the central bank has been lending money at rates well below those being charged in the market. It also lent for periods out to 158 days on Friday, well beyond the time frame of its typical operations.

Earlier in the week, RBA Deputy Governor Ric Battellino said the central bank stood ready to add more liquidity as needed, noting some market interest rates were still higher than usual.

However, the central bank really only controls the cost of overnight cash and, so far, has had little success bringing down longer-term rates.

"Notwithstanding all this overnight money, it's still the case that no one wants to lend at term," said Matthew Johnson, a senior economist at broker ICAP.

"The widening spread between overnight cash and term money serves to illustrate the nature of the current problem, and the limited ability of banks to cure it by merely adding overnight cash to the system."