The ECB reduces number of meetings and provides TLTRO details

Today’s ECB meeting contained much more information than we had expected. 

The ECB will change the frequency of its monetary policy meetings to a six-week cycle from January 2015 (the schedule dates will be published on 16 July). At the same time, the ECB will start to publish minutes of the monetary policy meetings. The ECB is still working on how much information the minutes will contain. 

Draghi was again asked whether the ECB could cut policy rates further and to that he repeated that technical adjustments could be made. But he also made it very clear that the ECB will keep the rate corridor unchanged; hence, a cut of 5-10bp in the refi and deposit rate is all that is left in the toolbox. This is also reflected in the ECB’s new forward guidance, which was repeated today: ‘the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation’. 

The possibility of a broad-based QE programme was also a topic and Draghi kept the door open as he said it completely depends on the medium-term outlook for inflation. If inflation declines, QE could be started even before the new TLTROs have ended as Draghi said that ‘there are no other considerations’ than the medium-term outlook for inflation. This was also reflected in the introductory statement where it was repeated that ‘the Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation’. It is not our main scenario that it will become necessary, but the ECB clearly signals that it is ready to do QE. 

If anything, we believe an ABS purchase programme is most likely. Today’s comments from Draghi show that such a programme will be simple and aimed at improving the situation of SMEs in the periphery countries. 

The ECB has published technical details of the TLTROs, see press release. 

In two initial allowances (18 September and 11 December 2014), banks will be able to take 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. 

From March 2015 to June 2016, each quarter banks will have access to borrow three times the cumulative amount of their net lending in excess of a specified benchmark. The benchmark depends on whether the bank was a positive or negative net lender in the 12- month period to 30 April 2014. For positive net lenders, the benchmarks will be set at zero. For negative net lenders there will be one benchmark until April 2015, which is the average monthly net lending in the year to 30 April 2014 extrapolated for 12 months. From May 2015 to April 2016, the benchmark monthly net lending is set at zero. 

Overall, these benchmarks are softer than our initial expectations as positive net lenders only have to expand lending to obtain the TLTROs. The negative net lenders can continue deleveraging but if they do it at a slower pace, they are eligible for the TLTROs. On the margin this is positive and increases the potential liquidity injection. 

Market reaction

The reaction in EUR rates was limited. Rates up to one year are marginally lower, as Draghi specified rather soft thresholds to qualify for additional TLTROs, i.e. higher excess liquidity and therefore slightly lower rates. A much bigger impact was seen in the govie markets where periphery markets rallied strongly despite upward pressure on core rates following another batch of strong US data. This is not unsurprising given as the construction of the TLTROs, the excess cash can easily be used for carry trades over the next years.