The ECB left policy unchanged at yesterday’s meeting, as was widely expected. What did change, however, was the assessment by the Governing Council of the balance of risks to euro area growth, which it now judges to be tilted to the downside. During the press conference following the meeting, Mario Draghi appeared to be setting the stage for upcoming policy changes.
The revised risk assessment is another step towards the announcement of some form of TLTROs, which could happen as early as the next policy-setting meeting on March 7, when the next round of staff macroeconomic projections will be published. We expect the growth outlook to be downgraded again and the ECB could also make its forward guidance on interest rate more dovish.
We have been making the case that some form of TLTROs is crucial. In their absence, Italian banks in particular will face a significant liquidity squeeze as loans made by the ECB under earlier TLTROs approach maturity. The first set of repayments is due in June 2020. But under new Basel bank regulations, lenders will start to feel the pressure from mid-2019 because the risk weighting of the loans will increase in the final year of their life. Draghi emphasised that TLTROs have been very effective in the transmission of monetary policy in the euro area. (T)LTROs do not resolve underlying faults at banks, but we think they can postpone the looming liquidity squeeze, especially at Italian lenders. Their impact will be muted.
As we forecast the ECB downgraded their growth forecast, pushed out their guidance on rates and announced TLTROs on the 7 March 2019. Furthermore the scheme had little impact and markets were disappointed.