The effort by major central banks to increase the supply of dollars globally to free-up credit isn't producing a torrent of new bank-to-bank lending, but short-term interests rates are headed in the right direction -- down.

The cost of borrowing dollars in London fell Friday, generating the first weekly decline since July, Bloomberg News reported.

The London rate for three-month loans in dollars declined for a fifth straight day, dipping 8 basis points to 4.42%, Bloomberg News reported. For the week, the rate declined 40 basis point. Meanwhile, the London interbank overnight rate, or LIBOR, fell another 27 basis points to 1.67%. Short-term rates in Asia also fell.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Short-term rates: small victories

Economist Peter Dawson said banks are not breaking out into a lovefest, but he'll take the interest rate progress, just the same.

"LIBOR continues to show progress. We're seeing more and more banks regain confidence in each other and return to overnight lending, as well as lending for other term lengths, so that's a clear positive. We need to maintain this momentum by recapitalizing viable banks, and removing toxic assets from the system," Dawson said. "Interest rates will not return to levels seen during the leveraging boom, but so long as they are at tolerable levels, that will be sufficient to maintain commerce, which is the goal here."

Short-term interest rates continue their downward trek, albeit at a snail's pace.

Overnight interest rates for dollars fell again early Thursday, after central banks provided $254 billion in emergency cash, Bloomberg News reported.

The London interbank overnight rate, or LIBOR, fell 20 basis points to 1.94%, Bloomberg News reported Thursday. The London three-month rate decreased 5 basis points to 4.50%.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Trend indicates liquidity is improving, gradually

Economist Peter Dawson told BloggingStocks Thursday the Bank of England's delay in its closure of emergency borrowing and the European Central Bank's acceptance of lower-rated securities as collateral and its lending of unlimited amounts of euros over the next six months has broadened the credit landscape.

The resources of the central bank of the world's second strongest economy have now been marshaled to address the global financial crisis.

The European Central Bank, led by President Jean-Claude Trichet has shifted policy - - a remarkable, historic change - - and is now working in coordination with its companion major central banks - - the U.S. Federal Reserve, Bank of England, Bank of Japan, and the Bank of China - - and others, to end a credit crisis that threatens to cripple international business and seriously damage economies, worldwide.

A legendary inflation hawk,Trichet, whose ECB lowered its key, short-term interest rate by 50 basis points in conjunction with the other major central banks on Wednesday, declined to rule out further steps to solve the crisis, including additional interest rate cuts, Bloomberg News reported Thursday.

ECB: banks offered unlimited cash at 3.75%

Further, and equally significant, Trichet offered banks unlimited cash at 3.75% to help them cope with tight credit markets, Reuters reported Thursday. Previously, the ECB had offered funds to the highest bidders, a tactic that pushed average rates as high as 4.99% - - almost 75 basis points above the official rate.

In addition, the ECB cut in half the premium it charges for overnight emergency loans and increased the interest rate it pays on deposits, Reuters reported Thursday.

The mood of banks toward banks remains cautious and guarded. The London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loans -- increased 157 basis points to 3.94% early Tuesday morning.

The Euribor, a similar rate for the euro, rose 22 basis point to 4.37%. However, the Euribor has fallen from Monday's all-time high of 5.35%.

Currency Trader Andrew Resnick told BloggingStocks Tuesday overnight interest rates remain at elevated levels mainly due to fear.

"The biggest problem, clearly, is the lack of confidence. There are distressed and bad bonds out there, but it should not be affecting the financial system this much. The reason it has is fear. No one knows who owns what bonds, and no one trusts anyone," Resnick said. "This is the worst condition I've seen in the credit markets in my 20 years of trading." Resnick added that he was presently flat, or had no open currency trading positions.

Resnick said central banks may have to guarantee the assets of creditors to banks and/or provide insurance (credit default swaps) to purchasers of corporate commercial paper to lower overnight interest rates and increase the flow of credit. Or central banks may have to "undertake a large investment in banks to recapitalize them," he said.