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DOW JONES     European Views: ECB: July meeting - No new measures, but further details on the TLTROs (Christina)

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Christina     posted : 06/07/14   01:03 am


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Published 01:42 PM Thu Jul 3 2014
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Bottom line: As widely expected, the ECB left policy rates unchanged at its July meeting. It also made no announcement of additional policy measures. At the same time, further details on the 'mechanics' of the TLTROs were provided. On a first read, the definition of the benchmarks that determine eligibility for (1) the full four-year period of the first two TLTROs and (2) the amount of borrowing at the second stage of the operations do not look very demanding. Finally, the ECB announced it would shift its policy meetings to a six-week frequency starting next year and would also start to publish minutes.
“Moderate recovery” continues
The prepared statement’s description of the economic and inflation outlook was broadly unchanged from last month. According to the Governing Council, “The latest information signals that the euro area economy continued its moderate recovery in the second quarter”. In addition, “annual HICP inflation is expected to remain at low levels over the coming months, before increasing gradually during 2015 and 2016” and “inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%”.
While the Governing Council acknowledges that inflation will stay low for a prolonged time, it expects the measures announced last month to help ease financial conditions further and thereby “contribute to a return of inflation rates to levels closer to 2%”. In any case, there was no indication, either in the prepared statement or at the press conference, that the Governing Council is leaning towards further measures at this point, even if Mr. Draghi was at pains to point out that there was unanimity behind the Governing Council’s commitment to do more should the inflation outlook deteriorate unexpectedly. Rather, President Draghi stressed that it would take time for the measures announced in June to work their way through the financial system.
TLTRO details: 'Benchmarks' defined in a generous manner
New information was provided on the form of the TLTROs announced in June. In particular, the benchmarks that determine eligibility for and borrowing caps applied in the various refinancing operations were defined. As already signalled by several GC members (and in line with our expectations), the ECB will set this benchmark on the basis of developments in a bank’s non-financial private sector loan book (excluding loans to households for house purchases). For banks that contracted loans on this definition in the 12 months to April 2014, the benchmark will be an extension of the monthly average during that period until April 2015 (thereafter the benchmark is set to be constant). To give an example, if a bank were reducing its loan book by around 10% during the relevant period, it would need to reduce its loan book by less than 10% in the following 12 months to beat its benchmark.
Beating the benchmark is relevant for two reasons. First, any liquidity borrowed under the first two TLTROs in September and December this year can be kept until September 2018 in that case. Otherwise, all borrowing at the TLTROs will need to be repaid in September 2016. Second, over the course of the six following TLTROs, a bank can borrow cumulatively up to 3 times the amount by which it beats its benchmark. For a bank that was reducing its relevant loan book by 10% over the April 2013-April 2014 reference period but maintained its loan book constant thereafter, re-financing of almost 40% (3 times 10% plus the original 7%) of its loan book via the ECB at the preferential TLTRO rate out to September 2018 would be possible.
For banks that have not reduced the loan book during the 12-month period up to April 2014, the benchmark is simply set to zero, i.e., any increase in the loan book qualifies as “beating the benchmark”.
Mr. Draghi mentioned during the press conference the possibility that the take-up could be up to €1 trillion, although he did not specify where this number was coming from. Prior to today’s press conference, our colleagues in Equity research estimated that the take-up could be between €720 billion and €910 billion. While there is necessarily some uncertainty involved in how much appetite banks will develop for these funding operations, today’s details suggest that the benchmarks are not particularly challenging and support the calculations leading to the take-up estimates our colleagues have offered.
Watching the exchange rate with “great attention”
When asked during the press conference to what extent the muted reaction of the exchange rate to last month’s announcements was a concern for the Governing Council, Mr. Draghi simply said that the exchange rate was an important factor in assessing the inflation outlook and that the ECB was watching the Euro with “great attention”. But he offered no insight into the measures the ECB may take should an appreciation of the Euro again pose a risk to the inflation outlook. Somewhat related to this, Mr. Draghi also repeated that further technical adjustments of the interest rate corridor would still be possible (and implicitly were seen as compatible with the forward guidance he had announced), and could have an effect on the exchange rate.
Little new on ABS programme
Mr. Draghi highlighted again during the press conference the overall importance the ECB assigns to a revival of the ABS market. But no real further information on the ABS programme was presented. The prepared statement simply repeated that “we have also started to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism”. At the same time, recognising that critics of a potential ABS purchase programme had pointed to the low volumes of such securities trading in the market, Mr. Draghi made two points: (1) including mortgage-backed securities, the outstanding stock of ABS in the Euro area exceeded €1trn; and (2) purchases by the ECB (as well as regulatory reform) could have a catalytic effect on the market, creating greater depth and liquidity.
Fewer meetings and minutes to be published
The ECB will, starting next year, shift to a six-week frequency for its monetary policy meetings and press conferences. Mr. Draghi explained the decision on the basis that, in the past, the existing monthly meeting frequency had created market expectations ahead of the meetings, even without much new information, which - when disappointed - created additional volatility. By shifting to a six-week frequency, the ECB hopes that "unfounded" expectations will develop to a lesser extent. Finally, the ECB will also start to publish minutes next year. How detailed these minutes will be, however, still needs to be determined.
Dirk Schumacher - Goldman Sachs AG

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