Euro bank lending rates slump after ECB auction

The cost of three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - fell a little less than 0.03 of a percentage point to 1.1850 percent after the European Central Bank successfully concluded its first 12-month refinancing operation. The 12-month rate also dropped over 0.02 percentage points to 1.5740 percent, while the one-month rate dropped around 0.05 percentage point to just above 0.84 percentThe euro442 billion ($617.83 billion) it has allotted to banks in the 16-country euro zone at the benchmark interest rate of 1 percent is also the largest amount the European Central Bank has ever done in a single auction. Analysts said the implications on money markets is to put downward pressure on short-term rates but may not do much to boost bank lending - the real aim of the Bank's extra loans. The European Central Bank has been criticized for not being as aggressive as the U.S. Federal Reserve or the Bank of England both in cutting interest rates or pursuing unconventional measures, such as boosting the money supply. Whereas the U.S. and Britain have shown some clear signs that recovery may not be too far away, the euro zone economic data has generally been somewhat downbeat, though admittedly not as bad as a few months ago. In May, the European Central Bank cut its main interest rate to a record low of 1 percent as well as extending the maximum maturity of its bank lending from six months to 12 months and pledged to provide unlimited liquidity at the new, longer maturity. It also unveiled a limited asset purchase program of buying euro60 billion worth of euro-denominated covered bonds -- a low-risk type of asset-backed securities. The hope behind such a policy is that it may raise prices of assets on bank balance sheets, keep prices from falling for too long or too far, and well as giving the banking system more funds to lend to homeowners and businesses. In contrast to the measures announced by the ECB, the Fed and the Bank of England have cut their interest rates to below 0.25 percent and 0.5 percent respectively and unveiled much larger programs to boost the money supply to get banks lending again. Most analysts think the Fed has a difficult balancing act -- expressing the view that the worst of the recession is over at the same time as not spooking investors into thinking that interest rates will rise any time soon.