ECB's Gift of Unlimited Liquidity

by: Steven Towns

The European Central Bank [ECB], eager to avert a year-end liquidity crunch, announced Monday it plans to offer unlimited funds to banks at below market rates in an auction Tuesday. The exact rate is set at or above 4.21% for a period of two weeks -- consistent with the ECB's goal of keeping rates near its 4.0% target. This marks the second time the ECB has said it will meet all bids at a specified rate; the first was this past August when the U.S. subprime mortgage mess began to unfold. At that time, the ECB injected overnight loans to banks totaling an unprecedented €95 billion. "There is always a heightened need for liquidity at the end of the year, but this year it is magnified because of the ongoing credit squeeze and cash hoarding," commented Nathalie Fillet, a London-based BNP Paribas interest-rate strategist. Inter-bank euro lending rates fell from more than 4.9% prior to the ECB's announcement to around 4.5% afterwards. The U.S. Federal Reserve is also providing liquidity to banks in auctions of up to $40B through year-end, in conjunction with efforts by global central banks to try and restore confidence to money and credit markets.

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