The ECB will not improve the terms of its ultra-cheap long-term loans for now, though this may change if it becomes clear that the euro zone economy is taking another turn for the worse, several sources familiar with the discussion told Reuters.
Banks will get their second chance to get the ECB’s four-year ‘TLTRO’ loans on Dec. 11. Following low demand at the first round in September, some analysts have speculated that the ECB will look to make this offering more attractive.
JP Morgan has said it expects that the fixed rate on the loans will be cut by 10 basis points to leave it flush with the ECB’s 0.05 percent main interest rate and that the amounts banks are allowed to take will be upped.
Speculation has built up that the changes could be announced at Thursday’s meeting. But four sources have told Reuters that with one installment of the loans already handed out at the original terms, changes would not be made at this stage.
One said «we will not change the rules» halfway through the game while another was slightly less definitive, saying: «There is no need for more stimulus at the moment, at least not until we get a better picture (of the state of the economy).”
A third source said that a change of the TLTRO terms had not been discussed at any level at the ECB, that it was not an issue for now, but that this could change if the economy took a turn for the worse though it was too early to say this.
The ECB declined to comment.
Balance sheet expansion
The euro zone economy has been mired in low growth and price pressure has been weak. Inflation edged up to 0.4 percent in October, first estimates showed on Friday, but that is still far below the ECB’s target of below but close to 2 percent.
The ECB hopes that by flooding the banking system with liquidity it will spill over into the real economy pushing down lending rates and coax cautious firms and consumers to invest and spend more.
To get there it has decided not to rely solely on banks’ appetite for new four-year loans, but to take a more active approach and expand its balance sheet by up to 1 trillion euros by also buying covered bonds and securitised private debt.
Such a level of expansion is necessary for a stimulus programme to be effective in boosting inflation, a Reuters poll showed last week.
It is also the level ECB President Mario Draghi hinted at when announcing the new private debt purchase programmes.
Banks can potentially take up to 400 billion euros in the first two rounds of the long-term loans in September and December combined, but after a disappointing take-up of 82.6 billion euros in September, banks are expected to take 170 billion in December, the poll also showed.
Economists also predicted in a similar poll in September the ECB was likely to spend around 300 billion euros buying asset-backed securities (ABS) and covered bonds.
So far, the ECB spent 1.7 billion euros on covered bonds. The latest figures are due later on Monday. It will start buying ABS later this month.