The Reserve Bank has hauled back dramatically on the liquidity it injected into the financial markets over the past week.

The RBA said this morning that it had provided $2.025 billion of funds via repurchase agreements to cover a system deficit of $1.969 billion, a much smaller cover than we saw last week when the best part of $12 billion was injected into the markets to cover much smaller deficits each day.

There was $US6.8 billion left in the Exchange Settlement Account on Friday night for weekend liquidity cover, still high, but down slightly on the $6.9 billion overnight Thursday.

The RBA’s move was in contrast to the Bank of Japan which injected another 1.5 trillion yen (or $A16.88 billion) into money markets to help stabilise them in the aftermath of last week’s turmoil.

The Bank of Japan announced the move on its website shortly after the opening of the stock market, which was sharply higher on news of a US rescue package for the financial sector.

The BoJ is one of six major central banks that pledged last week to coordinate monetary action to ensure a flow of liquidity after the collapse of investment giant Lehman Brothers.

The $US700 billion bailout fund has obviously helped stabilise market sentiment.

Peter Fray

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