MacroScope

ECB’s fingers crossed for private loans growth

August 4, 2014

Mostly bereft of policy options except for outright quantitative easing, European Central Bank President Mario Draghi hopes that hundreds of billions of euros more in cheap loans to banks will boost inflation.

The jury will be out for a long time before we get any decision on whether they have worked.

The first two rounds of cash, worth over one trillion euros and administered as an emergency shock treatment to a patient on the verge of breaking up, helped keep the euro zone alive. 

They were very successful in helping to push sovereign bond prices and stock prices higher, so averting fiscal disaster for several member states. After all, they were designed to create asset price inflation.

But these original Long Term Refinancing Operations (LTROs) clearly did very little to prop up consumer price inflation, which is now dangerously low at just 0.4 percent in the euro zone and negative in several member states.

ECB LTROs

This time around, banks taking the money, offered at near-zero cost, must lend on a portion of it to businesses, instead of no strings attached as before.

The hope is that in turn will help drive up inflation back to the 2 percent target — something which the ECB conveniently has made clear won’t happen for several years.

While we wait for the inflation numbers to turn, analysts and forecasters will be looking to data that are not currently very closely watched to get an idea of how the ECB is progressing. That also gives the ECB plenty of leeway, as holding the policy accountable to early measures of success is harder to do.

Only a handful of economists polled by Reuters last week even had a view on how much euro zone private sector loan growth would need to rise in order to be called a success.

It has been contracting on an annual basis for over two years, by 1.7 percent in June.

Some respondents thought 2 percent private loans growth would be a success.

ECB-private loansBut most of the usual forecasters on ECB monetary policy didn’t even answer the question, presumably because they didn’t yet have a view.

Indeed, compared with a usual sample of 40-60 or so people who forecast GDP or other major economic indicators, only a handful provide a forecast on the ECB’s private loans data for the euro zone.

The ECB says its Targeted Long-Term Refinancing Operations (TLTROs) are designed to boost lending to households and private firms. As part of that, the initial allowance in September and December will be equal to 7 percent of the total loans to non-financial private firms and households – excluding housing loans – in the euro zone outstanding on April 30, 2014.

Those will be followed up with loans every three months from March next year until June 2016, during which banks could take three times the cumulative lending to private firms in those quarters.

Although economists and euro money market traders polled over the past month expect banks to take up at least three-quarters of the 400 billion in cash on offer in September and December, none expect that to materially improve the real economy.

Why? Because it is not clear how rising lending to the private sector will push up consumer prices other than the fact that both tend to happen when an economy is doing well.

Victoria Clarke, an economist at Investec, said:

The bigger question is whether the ECB’s initiative will boost lending enough to be able pick up inflation. If you are just tinkering around the edges with lending initiatives you may not see that much impact on demand at the end at all.

From where it (private sector loans growth) is at the moment you need a considerable increase to really see a sizable pickup in demand … one that could sustain and bring a continued recovery in inflation numbers. So it has got some way to go.

We know almost for sure based on past experience that another round of cheap cash to hose down bank trading desks would push up asset prices. 

But will it push banks to lend?

Clarke says even if it does, we won’t know for a long time.

 Even if the TLTROs help, it certainly will take longer than six months for these things to feed through to the pipeline so it is not a quick-win initiative for the ECB.

It (the ECB) will be crossing its fingers and hoping for the best in terms of a better underlying pick-up in demand and perhaps driven by a stronger global economy in the meantime.

And the initiative (TLTROs) will be seen as ‘icing on the cake’ to try and provide that final boost to the recovery and hopefully a pickup in inflation as a result of that.

One euro zone money market trader summed the problem up this way:

Of course there is going to be strong demand at the TLTROs – banks will take cheap cash anytime it is on offer.

But will it help lending? I’m not so sure.

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