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ECB’s LTRO pumps £446bn into financial system

The European Central Bank boosted the eurozone financial system with close to £446bn in cheap loans this morning.

A total of £446bn was issued through the second phase of its longer-term refinancing operation when about 800 banks took the ECB up on its offer of three-year loans at 1.1 per cent interest.

This is above the £421bn the market expected banks to request. The first round of the operation, held at the end of last year, saw 532 banks borrow £412bn.

Jennifer Mckeown, senior European economist at Capital Economics, says: “The ECB’s loans should have a positive impact on the banking sector.

“December’s offer was widely credited with heading off an imminent bank funding crisis, as illustrated by the subsequent fall in interbank interest rates.”

However, she says the LTRO will not solve the eurozone’s fiscal and economic problems. She notes that banks appear unlikely to significantly increase their government bond purchasing or business and household lending despite the liquidity injection.

Howard Archer, chief UK and European economist at IHS Global Insight, says the first phase of LTRO appears to have been successful in bringing the bond yields of Italy and Spain down “substantially” and says a similar impact may come from today’s iteration.

However, he adds: “Even so, there are signs that the ECB will be reluctant to undertake a third unlimited three-year refinancing operation as there is concern within the bank’s governing council about the potential longer-term inflationary impact of so much cheap funding being made available.”

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