ECB emergency fund tapped for €3.9bn

The European Central Bank’s emergency lending fund, which attracts a penal interest rate, was tapped on Wednesday for €3.9bn – the largest sum since October 2004, the Frankfurt-institution has revealed.

By Ralph Atkins in Frankfurt, Copyright The Financial Times Limited 2007

The surge in demand for the ECB’s “marginal lending facility” pointed to the difficulties still being faced by European banks as a result of the global credit squeeze. The ECB revealed no details but it is likely that more than one borrower was involved. Use of the marginal lending facility attracts a 5 per cent interest rate – significantly higher than market rates.

The ECB took the initiative among central banks in addressing the credit squeeze on August 9, when it pumped an unprecedented €94.8bn into money markets. But it has kept a clear distinction between such liquidty-boosting operations and its main interest rate policy, aimed at combating inflation over the longer term.

Separate money supply and credit data released by the ECB on Thursday supported its inclination to raise eurozone interest rates further in coming months if possible. Despite the financial turbulence, lending to the private sector grew at an annual rate of 11.2 per cent in August. Lending to business accelerated to an annual rate of 14.2 per cent – the highest since records began in January 2000.

Growth in the broad money supply measure, M3, which the ECB sees as sending early inflation warning signals, remained high at 11.6 per cent in August, only slightly lower than July’s record of 11.7 per cent.

German inflation data, meanwhile, suggested that eurozone prices could soon be rising at a rate in excess of the ECB’s target – an annual inflation rate “below but close” to 2 per cent.

“Once the money market distortions fade, very strong M3 growth in combination with the increase in price risks….will probably bring inflation concerns back into the ECB’s focus,” said Marco Kramer, economist at Unicredit in Munich.

Since December 2005, the ECB has lifted its main interest rate eight times to 4 per cent. It had planned another rise, to 4.25 per cent, this month but shelved the move because of the uncertainty about the macroeconomic outlook resulting from the credit squeeze.