Why ECB’s measures may not fix lending nor inflation

“We believe the actions should help stabilize inflation expectations, limit the risk of deflation, have some effect in weakening the currency over time, and put an end to the contraction of the ECB’s balance sheet. We think that the TLTRO will reduce lending rates to the private sector, but that the effect on new lending will be limited, because a key reason lending constraints are in place is that credit risks remain elevated, and the new program cannot fix that issue,” Barclays analysts point out.

“The overall near-term effect of the measures is likely to be modest, as they will take time to affect the real economy, and we do not see them as powerful enough to prevent an extended period of below-target inflation,” they add.

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