The New Nation - Internet Edition

AFP, Frankfurt

The European Central Bank and the US Federal Reserve took fresh action on Friday to ease tightening credit linked to the home loans crisis in the United States.

The ECB added 40 billion euros (54 billion dollars) in three- month funds to the money market to cut borrowing costs in one of the areas hardest hit by the US subprime crisis.

The measure, designed to encourage lending by banks, was the first time the ECB had made a three-month injection outside its normal monthly schedule.

The ECB made the offer of the funds on Wednesday, saying it was "a technical measure aimed at supporting the normalisation of the functioning of the euro money market"

In its latest move, the US Federal Reserve injected 17.25 billion dollars into the financial system.

That brought the total added to money markets by the Fed in repurchase agreements to 120.5 billion dollars over the past two weeks. Central banks around the world began a series of major cash infusions on August 9 in response to the home loans crisis in the United States and turbulence on the markets is showing no signs of going away.

The ECB has pumped more than 200 billion euros into markets in recent weeks.

In a bid to ease lending between banks, the US central bank on Friday made a surprise cut in its discount rate to commercial banks to 5.75 percent from 6.25 percent

Holger Schmieding, Bank of America's chief economist for Europe, said banks were unwilling to lend to each other because of the uncertainty generated by the US credit crisis. "With the early intervention last week the ECB helped to do away with the liquidity shortage at the very short end of the money market," he told AFP.

"Today they acted to help with liquidity at the three-month end of liquidity.

"This offsets the reluctance of banks to lend to each other. Banks are reluctant to do so because they do not know which of their counterparts are having problems (with the subprime loans). "And if you are uncertain, you keep your cards close to your chest"

The situation is particularly difficult for longer-term credit

The three-month Euribor, the rate at which European banks lend money to each other, stands at more than 4.7 percent, its highest level since 2001 and higher than the ECB's own key refinancing rate of 4.0 percent

The ECB on Wednesday re-stated that it was maintaining the monetary policy stance expressed by its president, Jean-Claude Trichet, earlier this month.

Trichet had hinted strongly at a hike of a quarter of a percent in the key financing rate in September, taking it to 4.25 percent