ECB – Most likely done now

In addition, the ECB will intensify its efforts to boost the Asset Backed Security market (ABS), which could play an important role in the bank’s future monetary policy.

And last, but not least, it announced the launch of a new targeted LTRO (TLTRO), which will set incentives for banks to lend to the real economy. The ECB’s announcement of an “intensification of preparatory work related to outright purchases of ABS” did not come entirely unexpected.

As the ECB has mentioned many times, a revival of the ABS market in the Eurozone is urgently needed – not only because ABS (based on bank loans to corporates and households) would be the ECB’s preferred vehicle for Quantitative Easing (QE), but also because ABS could play an important role in the supply of liquidity to the corporate sector (including SMEs) and the de-risking of banks’ balance sheets.

However, irrespective of the ECB’s newly-declared ambition to accelerate the process, resurrecting the ABS market will take time and – importantly – require the support of international regulators. We believe that the new TLTRO is likely to be an attractively priced source of funding for banks, irrespective of whether or not they lend the funds to the private sector.

Access to TLTRO funding is likely to be particularly attractive for periphery banks, for which the costs of TLTRO could be as much as 109-114bp below equivalent wholesale funding for four years, or 68-73bp for two years if they do not increase net lending to the private sector.

While this impact is important, we are not sure the TLTRO will lead to a substantial increase in net lending in the Eurozone. After all, weak credit growth (particularly in the periphery and to SMEs) remains due to a combination of protracted supply and demand problems that will be overcome only gradually – irrespective of lower funding costs.

The ECB also published its new staff macroeconomic forecasts, which paint a picture of an ongoing, albeit moderate, economic recovery (with the risks still skewed to the downside) and a prolonged period of low inflation, but not deflation.

Following the disappointing Q1 GDP numbers, the ECB lowered its 2014 growth forecast to 1.0% from 1.2% in the March projections. However, the 2015 growth forecast was increased to 1.7% (from 1.5%), while the 2016 forecast was left unchanged, at 1.8%.

The inflation forecast (HICP) was cut visibly to 0.7% (from 1.0%) for 2014, to 1.1% from 1.3% for 2015, and to 1.4% from 1.5% for 2016. For Q4 2016, the ECB sees HICP at 1.5% (previously 1.7%).

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