The European Central Bank lent three-month funds to banks at its highest rate since April 2001, after unexpectedly strong demand on Wednesday from a market keen to secure liquidity to tide it over the end of the year.
Traders say rates have risen because the usual seasonal increase in demand for the funds for the holiday period is being boosted by fears of a liquidity shortage like that caused by anxiety over the millennium bug in late 1999.
The ECB allotted 50 billion euros ($73.7 billion) at an average rate of 4.70 percent in its regular monthly auction -- the widest spread over the ECB's 4 percent policy rate and the three-month EONIA swap rate, which embodies policy rate expectations, since the credit crunch started in August.
The last time the average rate was this high was in April 2001, when the ECB's key interest rate was three quarters of a percentage point higher at 4.75 percent and the ECB also allotted funds at 4.70 percent.
Dealers polled by Reuters on Tuesday had expected an average rate of 4.65 percent.
The high average rate and spreads reflects tight money market conditions. Three-month interbank loans were being quoted at an indicative 4.67/4.77 percent according to Reuters data, little changed from before the auction.
Benchmark three-month Euribor rates fixed at 4.743 percent earlier on Wednesday, not far off the 4.795 percent post-crunch peak set on Oct. 2.
"We didn't see any effect on markets after the (auction result) announcement. The amount they're needing is a lot more than the ECB is allotting," said a euro zone money market trader.
Some 175 banks put in 132.4 billion euros worth of bids at rates as high as 4.8 percent. The lowest successful bid was at 4.65 percent, but just 3.6 percent of the ECB's 50 billion euros was allotted at this rate.
The number of banks taking part is the highest since April last year, and relative to the amount of funds on offer, the sum bid is the highest since the ECB's Aug. 23 auction, its first tender of three-month funds after the credit crunch's start.
At last week's auction of three-month funds -- an extra injection outside the normal monthly schedule -- 130 banks put in bids totalling 148.0 billion euros, and the ECB allotted 60 billion euros at an average rate of 4.61 percent.
Money market tensions had appeared to have been easing until the middle of this month, when rates for two-month and three-month interbank loans rapidly recouped most of their losses.
The ECB only aims to keep overnight interest rates in line with its policy rate. On Friday it sought to calm markets by saying that it would continue to allot extra funds in its weekly auctions of one-week funds.
But high interbank lending rates potentially have knock-on effects on the rates paid by firms and consumers, slowing the economy, and the ECB is keeping a close watch on these when it sets interest rates.
The ECB's main rate has been on hold at 4 percent since June, as the ECB seeks to weigh the medium-term impact of the credit crunch against a backdrop of inflation pressure from high oil prices, rapid credit growth and an economy running near capacity.