ECB Lends Less Than Forecast in 12-Month Auction
The European Central Bank will lend banks less money than economists forecast in its second 12-month auction of unlimited funds, indicating banks’ need for cash has eased for now.
Banks bid for 75.2 billion euros ($110 billion) at the current benchmark interest rate of 1 percent, the Frankfurt- based ECB said today. It loaned a record 442 billion euros at the first auction in June and economists had forecast demand for 137.5 billion euros this month, according to the median of 16 estimates in a Bloomberg News survey.
“That it came that low is a bit of a surprise,” said Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart. “However, even expectations for anything beyond 100 billion were exaggerated in the first place. There isn’t just any major need for liquidity.”
The ECB, which will offer banks 12-month loans for a third time on Dec. 15, is flooding the system with money in the hope it will be lent on to companies and households. Money-market rates have dropped as the economy shows signs of emerging from recession and banks become less wary of lending to each other.
ECB Governing Council member Marko Kranjec said the demand “shows the system is liquid enough and that banks don’t need funds so much.”
The euro extended its advance against the dollar after the announcement and was up 0.6 percent to 1.4668 as of 12:27 p.m. in London.
‘Encouraging’
The ECB filled all bids in the auction. It said the 589 banks that participated, which compares with 1,121 in June, will receive the funds tomorrow.
“Weaker demand for ECB loans probably reflects the fact that banks feel more able to borrow from each other, which is encouraging,” said Jennifer McKeown, an economist at Capital Economists Ltd. in London. Still with banks “still concerned about further losses to come, there is a good chance that they will hoard the funds rather than lending them to firms and consumers.”
The Eonia overnight rate, the rate European banks charge each other for overnight loans, has declined to 0.35 percent from 2.2 percent at the start of the year. The euro interbank offered rate, or Euribor, for three-month loans this week fell to a record low of 0.74 percent from 5.24 percent a year ago.
‘Underpin Recovery’
In October last year, the ECB began lending banks as much money as they wanted for up to six months, 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.
While the ECB has retained the option of raising the rate it charges banks for the loans, President Jean-Claude Trichet said the September 12-month tender would be held at the benchmark rate. That should “promote the extension of credit to the euro-area economy and, therefore, further underpin its recovery,” he said on Sept. 3.
“The ECB’s commitment to keep the liquidity support in place is crucial for all players, because it reassures banks that long-term liquidity will remain readily available even in case of further unforeseen shocks,” said Marco Annunziata, Unicredit Group’s London-based chief economist.
The ECB expects the euro-area economy to grow 0.2 percent in 2010 after contracting 4.1 percent this year. The region probably emerged from recession this quarter, according to the European Commission.
ECB policy makers remain cautious.
“There is no need to rush to exit from monetary stimulus” and “no reason to change the monetary policy stance” at the moment, ECB council member Erkki Liikanen said yesterday.
European consumer prices fell more than economists forecast in September, declining 0.3 percent from a year earlier, a report today showed. Bank lending to euro-area households grew at the slowest annual rate on record in August, the ECB said Sept. 25.
On Sept. 28, Trichet urged banks to step up lending to the real economy. “Our message to banks is clear: do your job,” he said.