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More on LTROs

Also see

LTRO2: No bank safety in Draghi's
massive numbers

ECB: Two cheers for the three-year
ECB's new LTRO threatens the
covered bond market

“Monumental” uptake of ECB LTRO
but carry-trade impact unlikely

LTRO: A Talf for Europe

More on the LTRO
The ECB’s refinancing operations are unlikely to be affected by the Bank of England’s decision to allow banks to swap illiquid mortgage and other assets for newly-created, liquid treasury bills. "The ECB’s collateral framework is very broad, whereas the Bank of England’s is much more restrictive," says Daniel Pfaendler, head of rates research at Dresdner Kleinwort. "Many UK banks will still go to the ECB to finance their positions."

Indeed, at a meeting at the end of March, the ECB decided to offer supplementary longer-term refinancing operations with a six-month maturity. This is the first time that the central bank has auctioned six-month funds, previously the longest tender offered was three-months. The first tender was settled on April 3, and was more than four times oversubscribed. The auction of €25 billion in funds drew bids amounting to €103.1 billion, from 177 banks. Successful bidders will pay an average of 4.61% interest on the funds. Another six-month tender will be allotted on July 9, again to the amount of €25 billion.

In addition, the ECB will continue with its three-month refinancing operations. Two outstanding refinancings, each of €60 billion, will be replaced with two more. The first will be auctioned on May 21, and the second on June 11. Both will be for €50 billion. The ECB’s regular monthly refinancing operations will be unaffected by the longer term refinancing activity.

So demand for ECB funds will remain sky high, and will continue to do so long as the interbank rates make lending between financial institutions rare and costly. The ECB has been urged to cut its own rates to help promote the lowering of interbank rates, by such luminaries as the IMF and the Fed, among others. But the ECB’s mandate to prevent spiralling inflation is being used to justify keeping its main lending rate at 4%, where it has been since June of last year. With March seeing consumer price inflation hit a record high of 3.5%, well above the ECB’s target of 2%, many are now saying that the ECB will not cut rates for several months at least, if at all.

By contrast the Fed is expected to cut its key rate by another 25bp, which, according to Dresdner, could indicate that the Fed’s easing cycle is coming to an end.