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Speculation for TLTRO Plans Rises

6 March 2019

The European Central Bank will be holding its monetary policy meeting this week on Thursday. This will mark the second meeting this year. Expectations are for the ECB to start laying out plans for relaunching the Targeted Long Term Refinancing Operations, or TLTRO for short.

This speculation comes amid a prolonged weak patch of economic data. While headline inflation has been near the ECB’s 2.0% target rate, it has since eased back.

The Data

At the latest reading, the final inflation for January came in at 1.5%. Core inflation, seen by the ECB as a better measure of inflation as it excludes the volatile food and energy prices, stayed stubbornly near the 1.1% level.

This comes as the ECB ended its QE program in December 2018. While there is speculation that the ECB could turn dovish, some economists have said that that the central bank should respond to the slowdown by raising interest rates.

This seems counterintuitive compared to general expectations. ECB watchers have noted that the prolonged negative rates implemented since June 2014 could start to self defeat the purpose as banks continue to struggle to pass this on to depositors.

As a result, some circles of economists note that this could eventually curb credit and lending processes. This could remove further liquidity from the markets. And, of course, this could be detrimental to economic growth.

The counter advice further notes that the central bank should remove the tax on bank profits. It also suggests issuing a new round of cheap loans under the guise of the TLTRO program.

The Speculation

The speculation on what the ECB could do has started ahead of the March 7th meeting. Previous central bank meeting minutes have shown that the ECB’s governing council has been speculating on initiating the TLTRO program.

This thought was further given weight when the ECB governing council member, Benoit Couere mentioned a few weeks ago that the central bank should start considering this option seriously. Couere’s comments initially sent the euro falling.

At the same time, some economists argue that the decision to relaunch the TLTRO program could essentially render the ECB’s decision to end its QE program a mistake.

Some sides of the argument note that the ECB should lift the deposit rate which is currently at -0.4% to 0%. They suggest that the ECB also give strong forward guidance tilting on the hawkish side of the scale.

Economists note that by committing to keeping interest rates at zero, it would essentially ease the pressure of the European banks. They claim it could help the banking sector pass on the current monetary policy conditions into the real economy.

Such a decision could, of course, have other effects. This is especially true as some peripheral central banks in the European Union have started to signal that interest rates will rise from the current low levels.

One of the latest central banks to join the hawkish club was Sweden’s Riksbank. The bank recently hiked rates and forecast another rate hike during the year.

Economic Situation

Meanwhile, economic conditions continue to plague the eurozone. While for the moment, the threat of Washington imposing higher tariffs on German imports has subsided, there is no telling when Trump will start to put pressure again.

The trade talks with China have been progressing so far, with the latest developments indicating that there could be a positive outcome. President Trump pushed back the deadline of March end. This avoided the automatic hike in tariffs on Chinese goods imported to the United States.

Global trade has also been slowing which has been another concern for the eurozone. However, if the clouds of uncertainty pass over, especially in regards to the U.S. China trade talks, we could start to see some progress in trade, particularly in the eurozone.


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