Stockholm (Ekonamik) – At the March 7 meeting of the ECB’s governing council, the central bank of the Eurozone announced the launch of a new round of targeted longer-term refinancing operations. These operations are a means to provide accommodating liquidity to the currency area’s banks at a time of slowing economic growth. The ECB also decided to keep its policy rates unchanged.
“A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. Under TLTRO-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation. Like the outstanding TLTRO programme, TLTRO-III will feature built-in incentives for credit conditions to remain favourable. Further details on the precise terms of TLTRO-III will be communicated in due course,” according to the ECB’s press release on the occasion of this decision.
“Today’s decisions will support the further build-up of domestic price pressures and headline inflation developments over the medium term. Significant monetary policy stimulus will continue to be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of TLTROs,” said ECB president Mario Draghi in the subsequent press conference.
According to Pictet’s Asset Allocation and Macro Research Team, the decision was expected. “Considering the weakness in most economic indicators the ECB should maintain an adequate degree of monetary accommodation. This will likely require delivering another longer-term refinancing operation (LTRO, targeted or not) to avoid any tightening in liquidity and credit conditions,” the asset manager commented ahead of the meeting.
Adrian Hilton, Head of Global Rates and Currency at Columbia Threadneedle Investments, also saw the decision coming. “Mario Draghi may use the cover of lower macroeconomic projections to provide details of plans for a further Targeted Long Term Repo Operation (TLTRO). This is partly out of necessity: the previous operation begins to expire in Jun 2020, putting stable funding requirements under pressure for some Euro Area banks as soon as this summer. But lower forecasts also provide an economic reason to bolster the monetary policy transmission mechanism by extending the TLTRO programme.”
The decisions of the ECB “will make any future downturn quite hard to manage,” according to the RBC Global Asset Management’s Chief Economist Eric Lascelles. “The decision was motivated by two main factors: a growth target that was slashed from 1.7% to 1.1% for 2019 (we are at 1.25%), and an updated projection that inflation will hit just 1.6% in 2021 (meaning it will still be short of the ECB’s target in three years). In response, the ECB has now committed to not hiking rates for the entirety of 2019. It had previously made this promise merely with regards to the first half of the year.”
Picture from ECB