Rakan Mosely Head of Financial Markets Phone: (0)

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1 Rakan Mosely Head of Financial Markets Phone: (0)

2 The ECB s TLTROs: bazooka or peashooter? Ben May Senior Eurozone Economist bmay@oxfordeconomics.com June 2014

3 Outline What impact have the measures already had? How will the TLTRO programme work? How much demand will be for the loans from banks? Will it lead to a pick-up in bank lending? What are the likely effects on the economy?

4 ECB has reduced short-term rates Euro area: market interest rates % Eonia 3m Euribor Source: Oxford Economics/Haver Analytics/ECB

5 longer-term rates lower too Eurozone: Sovereign AAA yield curve (f'wd rate) % th May (the day before May's ECB meeting) 5th June (the day before June's ECB meeting) 16th July Years Source : Oxford Economics/Haver Analytics

6 but the impact on the euro has been muted Eurozone: Exchange rates Index - Q = 100 $/ $/ (RHS) Nominal effective exchange rate (LHS) Source : Oxford Economics/Haver Analytics May MPC meeting June MPC meeting

7 TLTROs could provide a major stimulus Eurozone: Relative size of the TLTROs % Bank lending to Eurozone GDP private sector (excl mortgages) Source : Oxford Economics/Haver Analytics Size of the TLTRO programme if banks took their full allotment measured as a share of GDP, banks' assets and total bank lending to the provate sector (excluding mortgages) Eurozone banks' assets

8 to both the core and the periphery Eurozone: Estimated share of TLTROs Portugal Greece Ireland Other Spain Germany Italy France Finland Austria Belgium Source : Oxford Economics/Haver Analytics Netherlands

9 The details 8 In theory 1trn can be borrowed by banks. 400bn this year and 600bn at six subsequent auctions. All loans mature in September The interest rates will be the refi rate at the time of the auction plus 10bps. Banks borrowing limits for the first two auctions are based on their outstanding lending as of April Subsequent entitlements will depend on banks lending behaviour in May 2014 and beyond. Conditions must be met to avoid repaying loans two years early.

10 Three-year LTROs have been repaid early Eurozone: Outstanding ECB LTROs bn Spain Italy 200 France Germany 0 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Source : Oxford Economics/Haver Analytics

11 but the TLTROs look attractive for banks ECB is effectively giving struggling banks a licence to increase their lending. The interest rate looks enticingly low. The lending conditions are not especially onerous. It won t require a major change in behaviour to avoid early repayment or to borrow more at the latter six auctions. Banks can repay the loans early if they want. 10

12 In the near term, ECB lending to banks will fall Eurozone: ECB lending to banks bn 1600 Historic data 100% take up of TLTROs % take up of TLTROS % take up of TLTROs No take up of TLTROs 1000 Forecast Source : Oxford Economics/Haver Analytics

13 Could lead to a switch back to bank financing Eurozone: Bank lending and debt issuance bn Net securities issuance by non-financial corproations Monthly change in net lending to the private sector, excluding mortgages Source : Oxford Economics/Haver Analytics

14 Small rises in lending may still have a big impact Eurozone: GDP % year Forecast Larger investment shock Smaller investment shock Baseline Source : Oxford Economics/Haver Analytics

15 Implications for monetary policy Impact of the TLTROs is highly uncertain and will take six months, probably longer, before it is possible to come to any judgement on its effects. But the effects on the macro economy are potentially large. Accordingly, the ECB will probably need to see strong evidence that the programme has failed before it is prepared to contemplate taking further significant policy action By then, we suspect that the worst of the negative effects from energy and food prices will have subsided and the euro may have weakened further. In other words, by then, the risk of deflation may be too slim for the ECB to contemplate QE. 14

16 Questions? Thank you! Ben May Senior Eurozone Economist June 2014

17 Rakan Mosely Head of Financial Markets Phone: (0)