ECB wants banks to tap into new funds

The programme is a key plank of ECB efforts to stave off the threat of deflation and breathe life into the eurozone economy, which stagnated in the second quarter. At 0.3 per cent, inflation is running well below the ECB target of just under 2 per cent.

The ECB will announce how much it is granting banks in the new loans tomorrow, doling out the fresh cash just as the cheap three-year long-term loans – or LTROs – that it issued in late 2011 and early 2012 approach expiry.

The new targeted funds, or TLTROs, will also offer banks long-term funding at interest rates close to zero, but will be tied to lending to the mostly smaller firms that are the eurozone’s economic backbone.

Analysts are sceptical the operation will boost lending.

“It doesn’t matter how much liquidity you give banks. They will still not lend,” said Fabio Ianno, a banking expert with ratings agency Fitch.

Fitch believes the weak state of many companies in southern Europe and subdued demand means banks have little appetite to issue corporate loans in the region.