Next year some €300bn of 3-year LTRO loans will mature and the challenge for the ECB is to make sure that it is able to compensate for this reduction in excess liquidity. They could simply leave it to existing liquidity operations as demand shifts from the maturing 3y LTROs to the MRO or 3m LTROs.
We think it more likely that they provide term liquidity and hope that this will be used to extend loans to the real economy especially as credit easing via ABS/RMBS/CB purchases will only have a modest liquidity impact.
We had been expecting the ECB meeting this week to announce:
1) a 10bp cut in premium over the refi rate, and
2) an extension in the maturity to 4-years as opposed to having them all the TLTROs mature in Sept 2018.
But the Reuters story, citing four sources, suggests that such modifications are unlikely this week. The Dec ECB meeting now seems more likely to change the terms of the TLTROs as it will still leave a week before the liquidity operation is conducted.
The latest inflation data (core rate back down to 0.7% in Oct) and non-energy manufacturing goods in deflation (at -0.1%) suggests that the inflation picture has deteriorated further. The PMI data still show that eurozone growth remains uneven and fragile with the German economy showing signs of being impacted by the Russian sanctions.
There is ample support from the data for the ECB to do more especially when some members feel that there is a “concrete risk of deflation” according to ECB/BoI’s Visco.
We are in an environment of policy activism from the ECB and while the pace at which easing is delivered might seem slow it is a lot faster than what we have been used to. The surprise easing at the June meeting and September show that the ECB majority is willing to deliver and is not taking the deflation threat lightly.