ECB Lends Banks More Than Forecast in 12-Month Tender
The European Central Bank will lend banks more money than economists forecast in its final tender of 12-month funds as some financial institutions try to lock in cash at a record low interest rate.
Banks bid for 96.9 billion euros ($141 billion), the Frankfurt-based ECB said today. Economists forecast that it would lend 75 billion euros, the median of 23 estimates in a Bloomberg News survey showed. The cost of borrowing is indexed to the average of the ECB’s benchmark rate rather than fixed at 1 percent, as it was in the previous two tenders.
President Jean-Claude Trichet said on Dec. 10 that market conditions are “stable enough” to allow the ECB to withdraw some of the emergency measures introduced to fight the financial crisis. While the decision to index the rate on the tender will increase banks’ funding costs should policymakers raise the benchmark rate from 1 percent next year, the demand suggests the majority don’t expect an increase next year.
“Banks’ bidding behavior suggests the majority of them don’t expect a change in the policy rate during the duration of the tender,” said Klaus Baader, co-chief European economist at Societe Generale in London. The size of demand “will cause the liquidity situation in money markets to stay relaxed. Overnight and short-term money-market rates will remain very, very low.”
The Eonia overnight rate, the rate European banks charge each other for overnight loans, has declined to about 0.35 percent from 2.2 percent at the start of the year.
The euro was little changed after the announcement, trading at $1.4558 at 12:11 p.m. in Frankfurt, from $1.4538 yesterday.
Flagship Policy
The ECB has flooded markets with cash to fight Europe’s worst recession since World War II and revive lending. It lent 75.2 billion euros at its last 12-month tender in September and a record 442 billion euros in June cash till payday.
The ECB said that 224 banks bid in the latest tender, compared with 589 in September and 1,121 in June.
The 12-month loans formed one of the ECB’s flagship policies this year. The bank will also discontinue its six-month loans after March and only guarantee unlimited funding in its other refinancing operations until April 13.
‘Orderly Unwinding’
The euro-region economy’s emergence from the recession in the third quarter is helping the ECB deploy exit strategies. The central bank earlier this month forecast the economy to expand around 0.8 percent next year and 1.2 percent in 2011 after contracting around 4 percent in 2009.
Still, council members have signaled that they’re in no rush to step up efforts on withdrawing stimulus. Austria’s Ewald Nowotny said in an interview on Dec. 14 that tenders “that we didn’t mention will go on for the time being.” Germany’s Axel Weber said on Dec. 9 that the ECB will have a “process of orderly unwinding” and that the bank will reduce liquidity “slowly and step-by-step.”
The ECB began lending banks as much money as they wanted in the aftermath of Lehman Brothers Holdings Inc.’s collapse last year, effectively assuming the role of the money market. In May this year, it announced it would extend the maximum maturity on its loans to 12 months.
“The ECB was more or less successful with its measures to avoid too strong a use of the 12-month tender,” said Juergen Michels, chief euro-region economist at Citigroup in London. “That will make the liquidity drain easier in 2010.”