The first TLTROII operations will have a residual maturity falling below one year this summer, which may lead to a liquidity squeeze for certain euro area banks within a few months. Therefore, we expect it to be quite certain that the ECB will have another longerterm liquidity operation, which we expect to be announced in March and implemented in June ahead of the implementation of the new NSFR in July 2019.
The effectiveness of the operation will depend on the modalities and the devil will be in the detail. It is uncertain how the ECB will structure such an operation and consequently how large a take-up there will be. The crucial modalities include rate procedure, eligibility criteria, maturity. In ECB Research - TLTRO3: Italy to be main beneficiary, 9 November 2018, we argued that if the modalities were identical to the ‘carrot approach’ under TLTRO2, we could see an additional EUR100-150bn taken. However, with the recent comments from ECB President Mario Draghi at the December press conference, we are leaning towards similar terms as with the 2011/12 VLTRO operations
Step 2 – postpone the guidance on the first rate hike
The first easy choice indicating a change in policy direction is a postponement of the first rate hike beyond the current ‘at least through the summer of 2019’ language from the ECB. The ECB has been doing forward guidance in recent years, and so stronger guidance is not a new phenomenon or politically difficult to do. However, with the US slowing down and China likewise, a significant postponement of an ECB hike guidance could well also mean that the ECB will not be able to hike in this cycle – leaving less room for manoeuvre in a future recession.
However, markets have already re-priced ECB expectations and this measure would be likely to have a limited impact. If the next step were communicated as a cut, however, a marked impact should be expected.
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The ECB had to abandon conventional Austrian doctrine and re-embark on quantitative easing in 2015, in large part to unwind the damage done to the region’s economy from withdrawing the first round of stimulus. The latest round of QE has just ended and the German economy is on the cusp of at least a technical recession, France and Italy are already embarking on fiscal stimulus and the banking sector is in a shambles. It is only a matter of time before another ECB volte face.