Cheap funding in focus for the ECB’s December meeting - ING

ING's Carsten Brzeski and Suvi Platerink expect the European Central Bank's (ECB) Targeted Longer-Term Refinancing Operations (TLTRO) to be at the heart of its stimulus package that we're expecting in December.

"It's been a very active week for ECB officials with comments by, amongst others, Christine Lagarde, Klaas Knot and Madis Muller, all suggesting the Bank is still keeping all options on the table going into its December meeting. While Klaas Knot didn’t want to exclude a rate cut, stressing that no single option should be ruled out in the decision-making process, ECB president Lagarde put the most focus on the PEPP, its Pandemic Emergency Purchase Programme and TLTROs as being highly effective and flexible instruments during the crisis."

"ECB Governing Council member Madis Muller indicated that the central bank’s stimulus package aimed for December should have the TLTRO operation at its core. According to Muller the PEPP by itself may not be the best tool."

"The TLTRO-III operation lasts for three years and currently has €1,699bn funds allotted to the banking sector. The operation has seven tranches altogether, with two more to go. The 6th tranche is allocated in December 2020 and the last one in March next year. To ease the TLTRO-III conditions the ECB has put in place a special interest rate period, during which banks can get the funds for a one year time period at -1% subject to meeting certain lending conditions. Currently, it runs from June 2020 for twelve months."

"Among the options the central bank could do in terms of the TLTRO-III programme could be to extend this special interest rate period to make it even more attractive to banks. This would also make the risk of substantial early repayments from tranches one to five in September 2021 less likely."

"Another option would be related to the lending benchmarks. Most participating banks are likely to be well-positioned to meet the two different lending thresholds. But for those which experience difficulties in meeting these conditions due to the sheer lack of lending demand, the ECB could take another look at how the lending benchmark calculation is set. It could even come up with another set of lending requirements."

"Should the ECB not provide new tranches to the TLTRO-III programme, easing some of its conditions would give even more importance to the last tranche due to be allotted next March. The ECB’s monetary policy had already been stretched when the eurozone entered the crisis. Besides stabilising financial markets and ensuring that the eurozone is not hit by another existential euro crisis on top of the current one (aka restoring transmission mechanisms), the ECB can only provide cheap liquidity to support the real economy."

"Going into the December meeting, it is clear that views on what to do still differ. We continue expecting the ECB to increase QE, spread across both the PEPP and APP, and to alter both the conditions and duration of the TLTROs."