Danske Research Team
Danske Bank A/S
The ECB’s aim with the TLTRO is to enhance the functioning of the monetary policy transmission mechanism. In order to assess the effectiveness we consider whether the liquidity will result in greater availability of credit (the supply side) and to what degree this transfers into new loans (the demand side).
Shortage of bank capital has been a headwind for credit creation as banks have cleaned up their balance sheets – especially up to the December 2013 snapshot for the ECB’s Asset Quality Review. However, it seems like this constraint is diminishing as bank capital has improved.
The latest evidence in the Bank Lending Survey suggests that demand for credit is increasing and that bank customers will take-up new loans following from the greater availability and/or lower prices of credit as a result of the TLTROs.
There are a number of channels through which the ECB’s easing is expected to affect growth and inflation. First of all, the cheap bank funding should result in higher availability of credit and a stronger liquidity effect.
The weakening of the exchange rate will also reduce the headwind on both growth and inflation as it improves price competitiveness and raises imported inflation.
Finally, lower yields will encourage business investments and foster higher spending. This should particularly be seen in the periphery countries, where the ‘hot potato’ effect has resulted in much lower yields.
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