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ECB Lends Banks $57.66 Billion in Overnight Funds

The European Central Bank added 42.245 billion euros ($57.66 billion) in temporary overnight funds to money markets on Thursday to ease tensions on the euro interbank lending market.

There was strong demand from banks for the extra funding after a rise in market rates for overnight cash on Wednesday to near six-year highs.

The funds were allotted at 4.06% and above for a weighted average rate of 4.13%. Forty-six banks bid for a total of 90.895 billion euros in the tender.

It was the ECB's first emergency injection of overnight funds since Aug. 14 but its fifth in the past month, as the central bank seeks to overcome liquidity bottlenecks due to concerns about the fallout from U.S. subprime mortgage problems.

The actions succeeded in taming rates at the short end of the market and the ECB has gradually withdrawn most of the extra cash. However, an extra allotment of 5 billion euros at its regular weekly tender on Tuesday proved insufficient to satisfy an unexpectedly high demand for cash.

The benchmark EONIA rate for interbank lending fixed at 4.588% on Wednesday, the highest since Oct. 2001 and almost 60 basis points above the ECB's benchmark 4% rate.

The ECB meets to set interest rates on Thursday. The latest announcement has increased speculation that the central bank might follow the U.S. Federal Reserve's lead and cut the 5.0% marginal rate at which it lends to banks which cannot find funds on the open market.

Contact Europe: Economy

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