>> GROUP: Shadow ECB Council / EZB-Schattenrat  Frederik Ducrozet

Frederik Ducrozet: Not only should the ECB discuss LTROs in March (after the January meeting was devoted to an “assessment”), I think they will need to drop a hint that some sort of extension is coming, either in the statement or during the Q&A, to avoid a negative market reaction. Our best guess is that the Governing Council (GC) will pre-commit to avoiding an unwarranted tightening of liquidity and financial conditions while tasking the relevant committees again to look into technical options, for new (T)LTROs to be unveiled in April and implemented in June.

There are two broad LTRO options available to the GC. Either they see an economic case for new Targeted operations, possibly featuring different maturities (shorter), rates (variable) or lending benchmarks (mortgages). Or they could opt for a mere maturity extension of previous operations to avoid an increase in term funding related to NSFR liquidity ratios (then again, possibly with a shorter maturity and variable instead of fixed rate). We have long favoured the ‘maturity extension’ LTRO option, although today’s weak bank lending data on top of concerns about Italian banks could fuel a debate about TLTROs.

More importantly, in our view, there are complementarities but also trade-offs between (T)LTROs, forward guidance on rates, and potential mitigation measures for negative rates. We expect the latter to be discussed more extensively over the coming months, including the possibility of a technical deposit rate hike to -0.25% or 0%, that would have to be complemented with a turbo-charged forward guidance not only over 2019, but over the medium term.

If core inflation fails to pick up, one could imagine an element of (implicit) price level targeting being introduced in the ECB’s forward guidance at some point, aimed at a better anchoring of inflation expectations. Either way, the risk that the ECB will not be in a position to hike rates at all before the next downturn has indeed increased further in recent months.

If we are right, then the ECB should be in no rush to change forward guidance or to design new LTROs in March, but instead lay the ground for a more comprehensive policy package to be announced by June. Incidentally, it would also help forge a broader consensus, if not unanimity, around the decision.
>> Kontakt