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| The European Central Bank (ECB) allotted loans of 442.241 billion euros to euro-zone banks for one year at a 1 percent interest rate. | ||
The cost of three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - fell a little less than 0.03 of a percentage point to 1.1850 percent after the European Central Bank successfully concluded its first 12-month refinancing operation.
The 12-month rate also dropped over 0.02 percentage points to 1.5740 percent, while the one-month rate dropped around 0.05 percentage point to just above 0.84 percent.
The euro442 billion ($617.83 billion) it has allotted to banks in the 16-country euro zone at the benchmark interest rate of 1 percent is also the largest amount the European Central Bank has ever done in a single auction.
Analysts said the implications on money markets is to put downward pressure on short-term rates but may not do much to boost bank lending - the real aim of the Bank's extra loans.
"Had the European banks applied for even more, I think the ECB would have accommodated them, even up to euro600 billion," said David Buik, markets analyst at BGC Partners.
"I cannot make up my mind whether this just crystallizes the gravity of Europe's economy and the parlous state of the banking sector, or whether it is just acknowledgment from the ECB that they are at last addressing the problem," he added.
The European Central Bank has been criticized by many for not being as aggressive as the U.S. Federal Reserve or the Bank of England both in cutting interest rates or pursuing unconventional measures, such as boosting the money supply.
Whereas the U.S. and Britain have shown some clear signs that recovery may not be too far away, the euro zone economic data has generally been somewhat downbeat, though admittedly not as bad as a few months ago.
In May, the European Central Bank cut its main interest rate to a record low of 1 percent as well as extending the maximum maturity of its bank lending from six months to 12 months and pledged to provide unlimited liquidity at the new, longer maturity.
It also unveiled a limited asset purchase program of buying euro60 billion worth of euro-denominated covered bonds - a low-risk type of asset-backed securities. The hope behind such a policy is that it may raise prices of assets on bank balance sheets, keep prices from falling for too long or too far, and well as giving the banking system more funds to lend to homeowners and businesses.
In contrast to the measures announced by the ECB, the Fed and the Bank of England have cut their interest rates to below 0.25 percent and 0.5 percent respectively and unveiled much larger programs to boost the money supply to get banks lending again.
The British Bankers' Association said the rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - fell 0.01 of a percentage point to 0.60 percent.
Though the Federal Reserve is expected to keep its benchmark rate unchanged at a range between zero and 0.25 percent at its policy meeting Wednesday - and for several months yet - the markets had started to price in the possibility that rates may start to rise by the beginning of next year.
Most analysts think the Fed has a difficult balancing act - expressing the view that the worst of the recession is over at the same time as not spooking investors into thinking that interest rates will rise any time soon.
"A discussion of exit policies may be necessary in order to assure markets that the necessary procedures are in place," said Jane Foley, research director at Forex.com.
"However, the Fed is expected to reassure the markets that the risks remain of a potential expansion of asset buying rather than a reversal in the immediate term," added Foley.
Elsewhere, the three-month British rate was also down 0.02 percentage point to 1.21 percent.
Interbank lending rates are important for the wider economy because they determine the cost of loans for households and businesses. They shot higher during the credit crunch but have been coming back down in recent weeks in the wake of massive efforts by governments and central banks to get lending going again.
(AP)
