When the European Central Bank’s (ECB) top officials meet Thursday, there is no way that they can ignore the worsening economic picture across the euro zone.
There’s even a chance they may highlight a potential policy response for the downturn, with uncertainties such as the U.S.-China trade war and Brexit still clouding the economic horizon.
This could be a renewal of its targeted long-term financing operations (TLTROs) for banks — these are multi-year cheap loans for the lenders — or even the lifting of the ECB’s deposit rate — the charge it gives to banks to hold cash — which could help them on the cost side.
Francois Lenoir | Reuters
European Central Bank President Mario Draghi testifies before the European Parliament’s Economic and Monetary Affairs Committee in Brussels, Belgium September 24, 2018.
Indeed, shares of euro zone banks jumped Wednesday after Bloomberg reported the central bank is holding discussions on the design of these new ultra-cheap bank loans.
“Upon significantly downgrading its near-term projections, the ECB will probably leave the more policy-relevant forecasts for the medium-term (2021) completely untouched,” said Florian Hense, an economist with Berenberg, in a research note.
“The ECB could announce this week, or in April, that it will offer a new round of longer-term funding for banks,” he added.
The euro zone economy continued its lowest pace of growth in four years during the final three months of 2018, data showed in January. However, some economists believe the current weakness in the euro area is just temporary, and the economy will pick up again during the course of this year.
Factors behind this reasoning include the recent German sluggishness, which they say is largely attributable to a car sector being weighed down by new emissions tests. There’s also the prospect of an agreement between China and the U.S. in their lingering trade dispute which could quickly boost sentiment across the globe.
But, clearly there’s the possibility of it all going wrong: No agreement between the EU and the U.K., a no-deal Brexit and an economy which will go from bad to worse.
So, for now even the biggest hawks do favor a “wait and see” approach.
The ECB ended its massive bond-buying program at the end of last year and is still set to start raising rates at the end of this summer. The debate about whether it makes sense to actually lift its deposit rate has already begun. Some believe that now could be the time when the actual benefits of having a negative deposit rate (it’s at -0.4 percent currently) could be outweighed by the costs it gives to banks.
Nonetheless, the most likely first step to counter an unwanted tightening would be a fresh round of TLTROs.
“Approximately 380 billion euros ($430 billion) in TLTROs — cheap loans that the ECB provided to banks — are set to mature in June 2020,” said Franck Dixmier, the global head of fixed income with Allianz Global Investors.
“Without a new liquidity program in place, the TLTRO repayments in 2020 would have a negative impact on the ECB’s balance sheet and lead to a significant tightening of monetary conditions.”
Economists are divided as to whether we will get any announcement this week or only in April. But it seems to be a given that the euro zone’s central bank will provide some sort of bridge financing for the region’s lenders.