The ECB will have to go beyond the monetary policy measures that have already been announced.
It will not probably be at today’s meeting as the next TLTRO operation is scheduled for December the 11th. But probably some new instruments will be presented at the next meeting on January the 22nd.
The first reason for this new approach is on macroeconomic ground.
The current economic situation is weak as it was suggested by the Markit survey yesterday. I think that we can have a recovery in 2015 linked to a lower euro and lower oil prices. But monetary policy has also to be supportive.
The rate of inflation at 0.3% in November is also a source of worry. It is to low and well below the ECB target of 2%. Moreover looking at the macroeconomic adjustment who can expect a rapid and certain convergence to the 2% target? It would be risky
That’s why the ECB has to act rapidly.
The current instruments that have been put in place by the ECB are not sufficient to fulfill all the ECB targets. That’s what Draghi and Constâncio have mentioned recently
There are three issues
The first is related to the TLTRO.
The operation of September the 18th was disappointing as it has increased the liquidity by only EUR 82.6bn. We cannot expect a lot more for the 11 December operation. The target of EUR 400bn that was announced by the ECB will not be satisfied.
Banks which will participate to the TLTRO need to have risky assets in their balance sheet and the will to transfer them to the ECB.
Banks that expect a strong flow of new credit will be able to use the new liquidity to satisfy this demand.
But usually in the current situation, the loan market is weak in the Euro Area and a bank that would come to the operation would have to pay 15bp for the operation and then 20 bp for the rate on reserves (the deposit facility rate is negative now). The cost would be 35bp. I’m not sure that, for the average bank, it will create a strong incentive.
The ECB also purchases covered bonds and ABS. Currently the amount of purchases for covered bonds was EUR 17.8bn and for ABS at EUR 0.4bn. (See here the document from the ECB at the date of November the 28th)
The amount of these purchases is too low to satisfy the target of an increase of EUR 1 000bn for the ECB balance sheet at the end of June 2016 that was announced by the Council of the Governors. To satisfy this target the balance sheet has to increase by EUR 10bn every week. The current increase since the beginning of the program in early September is only EUR 3.5bn. This is not sufficient.
That’s why Draghi and Constâncio want new instruments. With the current increase in the balance sheet, five and a half years would be necessary to fulfill the EUR 1000bn target.
New instruments have to be put in place in order to fix new rules and to fix expectations. It will probably be a Quantitative Easing of sovereign debt. I think that the measure and the directives for it will be announced on January the 22nd. Next meeting are March the 5th and April the 15th. It is too far in the future.
There is a need to act rapidly as the current situation in the Euro Area is deeply imbalanced