Central banks act again as credit crisis continues

Central banks have acted today to increase liquidity in money markets, as the US subprime meltdown continues to have effects around the world.

The US Federal Reserve cut its discount rate by 50 basis points to 5.75%, closer to its target for the federal funds rate of 5.25%. The move was intended "to promote the restoration of orderly conditions in financial markets", the Federal Reserve said in a statement, adding that it would extend term financing to 30 days until it believed that "market liquidity has improved materially".

The Bank of Japan also acted last night to improve liquidity by injecting 1.2 trillion yen into the market, after yesterday's 400 billion yen stimulus failed to bring the overnight call rate down to the bank's target of 0.5%. The Bank has been particularly active recently, first injecting 1.6 trillion yen at the end of last week to fight off the effects of the subprime crisis, then reversing itself to withdraw 3.6 trillion yen in order to prevent rates dropping too far.

And Glenn Stevens, governor of the Reserve Bank of Australia, told a committee of the House of Representatives that the bank intervened last night to prop up the Australian dollar in "rather thin disorderly markets". He did not reveal the extent of the intervention.

Global markets have remained unsettled this week as the extent of the crisis becomes clearer. The Chicago Board Options Exchange's Vix volatility index rose to 30.8, its highest level since March 2003, yesterday. The Japanese Nikkei index has lost 9% this week; the S&P 500 dropped 7% before recovering this morning; and in London the FTSE 100 has rallied and fallen within an 8% range.