Bank Demand Hits Record for ECB Loans
Bank Demand Hits Record for ECB Loans
Market expectations continued to fall for an interest-rate increase by the ECB at its Sept. 6 meeting, as cash-starved euro-zone banks demanded a record amount of three-month funds.
Bank Demand Hits Record
For ECB’s 3-Month Loans
By JOELLEN PERRY and MONICA HOUSTON-WAESCH
August 30, 2007; Page A6
FRANKFURT — Cash-starved euro-zone banks demanded a record amount of regular three-month funds from the European Central Bank yesterday, as market expectations for an interest-rate increase at the Sept. 6 bank’s meeting continued to fall.
In its regular three-month financing operation, the ECB pledged €50 billion, or about $68 billion, as expected. But bids for the funds totaled nearly €120 billion, and the cutoff lending rate beat expectations to hit 4.56%. The cutoff rate for last week’s extra, one-time offer of €40 billion was 4.49%, and at the ECB’s last regular three-month operation, on July 25, the cutoff rate was 4.2%.
“Some banks were bidding quite high, because they were concerned they weren’t getting enough liquidity,” said Marco Kramer, an economist with UniCredit Global Research in Munich. Mr. Kramer noted that the rise in longer-term borrowing costs “is basically the same thing as if the ECB had [already] hiked rates.” Banks are likely to pass higher borrowing costs on to businesses and consumers seeking loans.
Rates on the funds that banks lend to each other overnight have fallen to around the ECB’s 4% target since the bank injected massive amounts of short-term cash into the banking system earlier this month in response to a sharp tightening in credit markets. But three-month rates remain high, suggesting banks remain reluctant to lend to each other over longer periods.
Markets, which have been on a roller coaster since the ECB started pumping billions into money markets Aug. 9, now think there is only a small chance that the central bank will announce a quarter-point increase in its refinancing rate, to 4.25%, at next week’s meeting.
On Tuesday, ECB Executive Board member Lorenzo Bini Smaghi said markets had “perfectly understood” the bank’s president, Jean-Claude Trichet, who re-emphasized Monday that the bank isn’t “precommitted” to a rate rise. Mr. Trichet made clear that the bank, in a departure from its typical method of signaling rate decisions well in advance, is keeping its options open.
Many economists now maintain that the bank will remain on hold next week, to avoid further rattling jittery markets and to assess the economic impact of the financial turbulence.
But others contend that a still-robust economy and continuing inflation threats will push the bank to an increase next week. European Union officials yesterday said the turbulence hadn’t yet damaged the euro-zone’s growth prospects.
–Emese Bartha contributed to this article.
Write to Joellen Perry at joellen.perry@wsj.com and Monica Houston-Waesch at nikki.houston@dowjones.com