Poor loan data pushes ECB towards full QE

The ECB’s second round of long-term loans came in at the low end of analysts’ estimates, bolstering the case for the institution to start large-scale quantitative easing.

The bank said it allotted €130bn to eurozone banks at a fixed interest rate of 0.15% in its targeted longer-term refinancing operation. These TLTROs play a key role in president Mario Draghi’s drive to revive the eurozone economy by injecting as much as €1 trillion in liquidity into the financial system.

Yesterday’s offer will fuel the debate among policymakers over whether current stimulus is enough, or if they need to start buying assets such as government bonds.

“It now looks close to impossible for the ECB to achieve anywhere near a €1tn balance-sheet expansion with its existing measures,” said Nick Kounis of ABN Amro Bank in Amsterdam. “It will need to broaden asset purchases, and sovereign bonds will need to be part of the mix. The bottom line is that the disappointing TLTRO outcome has brought sovereign quantitative easing another step closer.”

The TLTRO programme got off to a slow start in September. The two operations combined have lent €212bn, compared with the ECB’s calculation of a total eligibility of €400bn. Six other TLTROs will be conducted through 2016, with the size of loans linked to banks’ new lending to companies and households. All the loans mature in September 2018.

“The TLTRO take-up in the second operation was within the ECB’s and market estimates and expectations,” executive board member Benoit Coeure said. “We can clearly see that the TLTROs contribute to improving banks’ access to longer- term liquidity. Together with our other measures, they create conditions that stimulate credit growth to the real economy and reduce financial fragmentation in line with our policy goals.”

Even so, the ECB’s balance sheet has barely budged as new liquidity injections are countered by repayments of crisis-era loans issued in 2011 and 2012. Those mature by February, with banks still on the hook for €257bn. That’s spurring policymakers to look for other ways to boost the balance sheet.

Mr Draghi said last week that the ECB is “getting more control” by buying assets directly. It started purchases of covered bonds in October and asset-backed securities last month. Inflation in the eurozone was 0.3% in November, matching a five-year low. A plunge in oil prices is putting further downward pressure on the rate.

Mr Draghi said last week that the governing council has discussed all assets except gold for the potential expansion of its purchase programmes. A package of quantitative easing will be prepared for consideration at the ECB’s January 22 monetary-policy meeting.