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ECB Lends 3-Month Funds at Highest Rate Since 2001

The European Central Bank allotted 50 billion euros of three-month refinancing on Wednesday at an average rate of 4.63% -- the highest since March 2001 and evidence of continued tightness on the euro money market.

Banks showed strong demand for ECB funds at the regular tender, with 159 bidding for more than 85 billion euros in refinancing. The three-month euro zone interbank lending market has been one of the sectors hardest hit by the global credit squeeze.

Three-month Euribor interbank rates - fixed at 4.726% earlier on Wednesday, near their highest levels since May 2001, as uncertainty about who is overexposed to losses from the U.S. subprime mortgage market continues to make banks unwilling to lend to each other.

Unlike in the United States and Britain, euro zone three-month market rates did not ease much after the U.S. Federal Reserve cut interest rates last week.

The highest bid at the ECB auction was 4.80%, and the lowest successful bid, or marginal rate, was 4.50% -- a 41 basis point spread above the three-month EONIA swap rate of 4.086%.

ECB policymakers are awaiting the bank's next lending survey, due in early November, to see how tighter credit market conditions are affecting borrowing conditions for firms and consumers. The ECB's main interest rate is 4.0%, and most economists do not expect it to raise rates again before the start of next year. In March 2001, the benchmark rate was at a peak of 4.75%.

Still Tense

The rates at the auction were broadly in line with a Reuters poll of traders conducted on Tuesday, who saw a marginal rate of 4.51% and an average rate of 4.60%.

At the ECB's last tender of three-month funds on Sept. 13 -- a one-off injection of 75 billion euros in liquidity to ease money market tensions -- the marginal rate was 4.35% and the average rate 4.52%. Tuesday's tender replaces 50 billion euros of refinancing that matures on Sept. 27.

Three-month money market rates did not ease after the auction result was published, trading at an indicative bid/ask spread of 4.65/4.75%, according to Reuters data. "It's still very tense," a euro zone trader said.

The tightness has extended into the overnight and one-week lending markets, after Monday's ECB tender allotted one-week funds at their widest ever spread over the ECB's minimum bid rate.

Traders said the extra demand for liquidity was due to the upcoming end of the quarter, when financing is rolled over.

"It's the quarter end so that's the pushing the market up. Everybody wants to make sure they have enough liquidity to handle the end of the quarter ... so it will be over as soon as the weekend is over," a trader said.

Overnight deposits are trading at a bid/ask spread of 4.26/4.39%, and one-week lending is at 4.28/4.34%.