ECB pours cash into money market

By Eva Kuehnen and Krista Hughes

FRANKFURT (Reuters) - Seeking to spur bank lending and pull the economy out of recession, the European Central Bank poured 442 billion euros (375.6 billion pounds) of one-year funds into money markets on Wednesday, its biggest fund injection ever.

The massive loan, the central bank's first money market operation with a term as long as one year, immediately pushed some bank-to-bank borrowing costs to fresh record lows.

That, the ECB hopes, may give banks enough financial security for them to make more long-term loans to companies and consumers.

A record 1,121 banks rushed to take up the ECB's offer of umlimited funds at a fixed rate of 1 percent, betting they might not see such cheap money again. Recent data suggests the euro zone economy may start a slow recovery late in 2009, making the ECB unlikely to cut interest rates further.

"We are drowning in money," said a trader at one euro-zone bank. "Maybe now money will finally move into longer-term maturities."

The allotment beat median expectations of 25 traders in a Reuters poll for 300 billion euros, and exceeded the previous record ECB allotment of 349 billion euros in December 2007.

"If financial institutions judge that interest rates are now likely to have troughed in the euro area, this operation represents possibly the final opportunity to obtain 12-month funding at just 1 percent," said analyst Colin Ellis at Daiwa Securities.

"This could be the case even if rates edge a little lower, as the ECB has raised the possibility of charging a premium for future longer-term operations."