The European Central Bank's first-ever auction of six-month funds on Wednesday saw banks bidding more than four times the 25 billion euros on offer as they sought cash they struggle to raise on financial markets.
But market watchers said the ECB's action was unlikely to be enough to achieve its goal of reducing interbank lending rates, which eight months after the start of the credit squeeze are still way out of line with official central bank rates.
"It's more like a drop in the ocean to be honest but it's welcome," a money market trader said.
Some 177 banks bid for 103.1 billion euros ($161.2 billion) in funding, and the ECB will lend successful bidders a total of 25 billion euros for six months. This is the longest maturity ever offered by the ECB, which mostly lends for one-week terms with smaller sums available for three months.
The average interest rate successful banks will pay the ECB is 4.61 percent, above the 4.56 percent expected by traders polled by Reuters on Tuesday after the auction opened.
The lowest successful bid, or marginal rate, was 4.55 percent, also above the 4.48 percent expected by traders. Bids ranged from 2.00 percent to 4.88 percent.
The ECB funds, for which banks must deposit collateral, are cheaper than banks' usual unsecured market financing.
Minutes before the ECB released the auction results, six-month unsecured Euribor rates fixed for the day at 4.737 percent, the highest since late December.
The auction did little to move rates immediately. Indicative six-month prices quoted on Reuters ere static at a bid-ask spread of 4.63-4.73 percent after the auction.
"There's still definitely more liquidity needed on term. In the current environment, with the ECB still very hawkish on inflation, this auction will have relatively little impact on three-month and six-month Euribor," said Nathalie Fillet, senior interest rate strategist for French bank BNP Paribas.
Market Turmoil
The high market rates compare with the ECB's current policy rate of 4 percent and represent a 75 basis point risk premium over Tuesday's six-month overnight swap rate against typical premia of a handful of basis points before the start of euro zone credit market turbulence last August.
Unpleasant surprises such as the billions of euros worth of subprime-linked losses revealed by Germany's Deutsche Bank and Switzerland's UBS on Tuesday have fuelled the mistrust that has plagued interbank lending markets for months.
"It's still the same problem with confidence and a shortage of liquidity. Because there are still write-downs it will take time for the markets to digest all this," Fillet said.
The ECB's main, and generally successful, aim in intervening in money markets has been to keep overnight rates in line with its 4 percent policy rates.
But longer-term Euribor rates form the basis for much short-term consumer and business borrowing in the euro zone, and thus there is a risk of banks' liquidity shortages spilling over into the broader economy.
With risk premia remaining high, Fillet said the ECB may ultimately have to face cutting rates to address the current slowdown in growth in the euro zone, even if its main worry, inflation, is currently at a record 3.5 percent.
"The problem is that the ECB's focus on inflation is maybe not the most important thing now. The economy is slowing dramatically and there's still a problem of confidence in the markets," she said.
But the ECB has a few more chances to ease down market rates. Its has extra auctions of three-month funds on May 21 and June 11 and another six-month auction scheduled for July 9.