The European Central Bank lent commercial banks a record 442.24 billion euros (620 billion dollars) at 1.0 percent on Wednesday via its first offer of 12-month funds in a bid to boost credit flows. Analysts at UniCredit markets expected the ECB's spectacular move to result in lower rates charged by commercial banks for long-term borrowing, but others were less sure.
If that happens, lower rates could provide a crucial contribution to recovery as the eurozone grapples with what is expected to be a sluggish rebound from the worst global recession in more than 60 years. German Finance Minister Peer Steinbrueck welcomed the move, saying: "The ECB has done what is right and necessary to avoid a credit squeeze."
In Paris, the OECD group of 30 advanced economies urged authorities to push interest rates towards zero meanwhile and to continue supporting the financial sector until a sustained recovery is underway. The ECB has resisted so-called "quantitative easing" (QE) enacted by the US Federal Reserve and Bank of England (BoE) - essentially printing money to buy state and private debt to boost recession-hit economies.
Instead, the ECB has generated a flood of cash through loans that will now extend to 371 days, or 12 months, from one week to six months in the past. The previous record for the central bank's refinancing operations was 348.6 billion euros in two-week funds at 4.21 percent as crisis-hit banks bolstered their balance sheets in December 2007 for the crunch year-end period.
"My guess is that the ECB is pretty pleased with the result" this time, said Goldman Sachs economist Erik Nielsen. He noted that a "huge number of banks," 1,121, had taken up the ECB loans. Elga Bartsch at Morgan Stanley said her house thought "the ECB's strategy of passive QE, where it guarantees full allocation of all bids at a fixed rate, is preferable to active QE" as practised by its peers, which could fuel inflation. Citi economist Juergen Michels was less sure.
"It is questionable if the ECB's measures, which solely focus on the banking sector, will be successful in improving overall financing conditions," he said. It might have been commercial banks' only chance to get a one-year loan at the ECB's lowest rate ever. The central bank has said that in subsequent one-year operations - others are scheduled in late September and mid December - the rate could be higher depending on market conditions.
Michels said the latest operation raised the ECB's total outstanding market loans to a record 897 billion euros amid a financial crisis that spiked with the collapse of US investment bank Lehman Brothers in September 2008. By providing massive amounts of cash to commercial banks, the ECB wants to lower the cost of borrowing by companies and individuals, and spur economic activity.
Money markets influenced by central bank operations determine the flow of credit for vast numbers of people, from managers trying to fund their businesses to families and students seeking mortgages and personal loans. The ECB's move initially pushed the benchmark 12-month euro interbank offered rate (Euribor) to a record low of 1.57 percent, Capital Economics economist Daniele Antonucci noted.
He also warned however that "there is no guarantee that eurozone banks will use this extra liquidity to lend to the broader economy." Michels said the ECB would probably "wait and see" if banks relayed the credit, and leave its key rate at 1.0 percent for a while in the meantime.
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