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Concerted efforts by governments around the world to unfreeze the short-term credit markets are beginning to bear fruit, key rates and data showed on Thursday.

The London interbank offered rate, or Libor – which measures the rates banks charge each other – fell for a fourth consecutive day. On Thursday the rate for three-month loans in dollars was set at 4.50 per cent, down 5 basis points.

Yields on commercial paper (CP), short-dated debt widely used by banks and companies for their short-term funding needs, dropped 34bp to 3.93 per cent for 30-day maturities.

The amount of CP outstanding in the US market shrank for the fifth straight week, but the declines are slowing, data released from the Federal Reserve on Thursday showed.

“It’s baby steps,” said Ajay Rajadhyaksha, a strategist at Barclays Capital. The easing in the money market “isn’t happening immediately, but we are moving in the right direction”.

Lending between banks and investors in the short-term money market had been largely frozen since the bankruptcy of Lehman Brothers shattered trust between financial institutions, which act as counterparties to each other in short-term lending.

Since then, central banks and governments have taken a wide range of unprecedented steps to restore confidence in the financial markets. However, the turmoil is expected to damage economic growth prospects, and stock markets around the world have plunged and many longer-term credit markets are virtually shut.

“We will continue to see stocks try to figure out how bad the recession will be and what that means for companies’ earning power,” Mr Rajadhyaksha said. “In the money markets, we should start evaluating things on merit rather than fear. Most central banks . . . are putting their full force behind the money markets.”

Central banks have injected billions of dollars of liquidity into the financial system. On Thursday, the Bank of England said it would make more cash available to banks by launching a discount window facility next week, and the Swiss National Bank said it would create a vehicle to buy troubled assets, part of a rescue for UBS and Credit Suisse.

On Wednesday, the European Central Bank substantially increased available funds, by allowing banks a broader range of collateral and by lending in currencies other than the euro.

The US commercial paper market contracted by $40.3bn in the latest week. It was the smallest drop in the past month, during which CP has fallen by $304.7bn.

In an effort to revive the market, the Federal Reserve will buy commercial paper through a programme that becomes fully functional on October 27.

Copyright The Financial Times Limited 2017. All rights reserved.

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