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ECB’s cheap loans will return this year, Credit Agricole says
ECB

ECB’s cheap loans will return this year, Credit Agricole says

15.01.2022
The bank is expected to start pumping out cheap liquidity again in order to support financial institutions
The ECB conducted its last TLTRO offering in December
The ECB conducted its last TLTRO offering in December
Photo credit: Shutterstock

The European Central Bank will backtrack on plans to wean banks off cheap loans, according to Credit Agricole SA.

The ECB may announce targeted long-term refinancing operations, known as TLTROs, as soon as July, said Louis Harreau, rates strategist at the Paris-based lender. That would reinstate the policy tool less than a year after it was concluded.

First introduced a decade ago to helps banks weather the region’s debt crisis, the operations have been integral in keeping financial conditions loose. In a bid to unwind its super-easy policy in the face of record high inflation, the ECB conducted its last TLTRO offering in December. 

But Harreau expects the bank will have to start pumping out cheap liquidity again in order to support financial institutions now grappling with the prospect of higher borrowing costs. Money markets are wagering the ECB will raise the deposit rate to 0% by the end of next year, from minus 0.5% currently.

“In the post-Eurozone sovereign debt crisis, we doubt that the ECB will be able to end its TLTRO,” The injections total € 2.2 trillion, about half of the total spare cash floating around in the banking system.

The most recent TLTRO iteration offered a sweetener rate if certain lending criteria were met, that ends in June, raising fears of a sharp drop in excess liquidity should banks decide to subsequently return the cash. That helped drive the premium on 12-month funding to the highest level in almost two years over current rates last month.

The ECB could announce details of an extension to its program of cheap loans as soon as July, with the first of four new quarterly funding rounds beginning in December, Harreau said. 

Policy makers will “continue to monitor bank funding conditions and ensure that the maturing of TLTRO III operations does not hamper the smooth transmission of our monetary policy,” President Christine Lagarde said following the ECB’s rate decision in December. 

Harreau said the cheap loans should become a permanent policy tool. “A regular, predetermined implementation of operations would reduce uncertainty and ensure that banks are able to lend to the private economy under the best possible conditions,” he added.

©2022 Bloomberg L.P.


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