Sunday 22 September 2019

ECB officials dodge questions on new loans

European Central Bank policymaker Olli Rehn
European Central Bank policymaker Olli Rehn

Alessandro Speciale, Piotr Skolimowski and Marcus Bensasson

European Central Bank policymaker Olli Rehn has sidestepped a question on whether it is considering another round of cheap long-term loans to banks as a potential response to economic turmoil.

"If needed we will then consider the whole toolbox we have at our disposal," Rehn said at a panel in Athens alongside four other euro-area central governors. "Next time we will assess in more detail and broadly the economic outlook."

His comments came after Market News reported a plan for new round of loans to banks could be discussed as soon as the ECB's December 13 meeting. Only a serious economic shock could prompt the move, the report said, citing people familiar with the discussion. Euro-area growth slowed to its weakest pace in four years in the third quarter, fanning speculation the ECB may be forced to rethink plans to start removing the stimulus. A number of ECB officials dismissed those concerns earlier this week, saying recent disappointing indicators don't fundamentally change their outlook on inflation and growth. If the region's economic prospects were to worsen significantly, the report said a new round of Targeted Longer-Term Refinancing Operations would be the first line of defence.

Bloomberg reported last month that some banks have been in contact with the ECB to discuss the risk of letting the four- year loans, known as TLTROs, expire without affordable alternatives being in place. One concern is that lenders could be forced to refinance just as market rates rise, spurred by tighter US monetary policy and tensions such as Brexit and Italian politics. Italian two-year notes rose after the Market News report.

Italy took out about a third of the funds provided by the ECB under the first two TLTRO programs between 2014 and 2017, and banks in the country could face higher refinancing costs next year amid financial market turmoil. ECB President Mario Draghi said in his October 25 press conference that two Governing Council members had raised the issue of TLTROs, "but not in any detail". Bank of France Governor Francois Villeroy de Galhau said in a speech on that same day that the loans need to be considered.

Rehn said the Governing Council will have a new set of forecasts in December to help them decide what to do next. The process of policy normalisation was data-dependent and the stimulus was not going away as the ECB plans to reinvest proceeds from maturing bonds, he added. Speaking at the same panel, Belgian central banker Jan Smets said the ECB was key in stabilising the euro-area economy. To Greek Governor Yannis Stournaras, the ECB and its non- standard measures helped avoid the breakup of the euro area: "Without ECB intervention, I do not know if we'd be here today," he said.



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