The monetary policy tightening did not last even two months recently. The ECB President Mario Draghi is going to launch the printing press again in order to breathe life back to the Eurozone economy with the help of money emission and additional liquidity. The European Union economic growth slowed down to the same pace as for the Russian Federation, and would slightly exceed a level of 1.3% in 2019, according to the European Commission’s forecast.
The European Central Bank finished its long-lasting quantitative easing programme of purchasing assets with a total volume of EUR 2.6 trillion additional liquidity injected into the financial system. But the regulator renewed its vision in the side of soft monetary policy as early as in February, considering more volume of capital injections. The central bank’s officials think about re-launching the programme of long-term credits for commercial banks (TLTRO), which used to work in the period of 2014-2017, as the latest meeting minutes showed.
The TLTRO mechanism is equal to injections of free money for the banks as the regulator’s loan is made with accordance to the key interest rates set for 0% per annum. The total volume of such credits exceeded 1 trillion euros by the end of December, however, a third party has been already paid back, as the ECB’s credit portfolio was reaching a volume of 717 billion euros for the TLTRO programme on February 22. The payback term will come in June 2020 for most of such credits (for 399.3 billion euros) and in March 2021 (for 233.4 billion euros).
The ECB officials are concerned about a potential clipping effect because of the need to pay those credits back. The main idea is to take a lead in the process, launching a new round of credits as early as this year. The economic growth has been unexpectedly week in the Eurozone for three quarters in a row recently, according to the ECB statement. The Italian economy slipped into a technical recession (falling two quarters in a row), while Germany avoided that by a miracle as the GDP dropped by 0.2% in the third quarter and remained flat in the fourth quarter of 2018. The Manufacturing Purchase Managers Index dropped below 50 points in Germany in January - that’s the threshold dividing the growth from decline. French composite PMI sank far below into the negative territory (47.7 points).
Forecasts for 2019 are also sad, according to the European Commission. German GDP is predicted to slow down to 1.1%, French - to 1.3%, while the Italian GDP is expected to go down to a miserable growth of 0.2% in 2019. Such an environment requires an appropriate technical analysis to be provided, which is needed for getting options for the monetary policy ready, as well as for future liquidity operations.
According to the Reuters agency, a new round of TLTRO will be discussed during the next ECB meeting, which will take place this Thursday, while the actual programme launch will start as early as this summer.
The new round of stimulative loans is actively supported by two ECB members - Benoit Kereau and Peter Prat. However, several officials are not so confident yet about the need for excess liquidity to be imposed. The doubt is related to worries that such a stimulus would look like they help separate banks.
The printing press launch had crashed the single European currency exchange rate from 1.4 in 2014 to 12-year lows around 1.03 dollars per one euro in 2017. The weak currency used to support exports, however, ECB is currently trapped, as Aberdeen Standard Investment Manager James Archie says: the regulator does not have an opportunity to start tightening the financial conditions without troubles. For now, even hiking the key interest rate from -0.4% to 0% looks impossible, according to Archie. That would lead to an immediate euro’s growth, banks’ troubles and the economic growth slowdown.