Most market watchers aren´t expecting the ECB to make any significant moves at the rate-setting meeting on Thursday.
“It should already be doing much more in order to fulfill its price stability mandate –inflation below 2%–,”analysts at JP Morgan commented.
Tomorrow is the ECBs last chance to make the next TLTRO more enticing for eurozone banks. It also offers an opportunity for the Frankfurt-based institution to get closer to the BoJ and proceedwith a large stimulus, in contrast to the Fed and the BoE.
JP Morgan economists expect the ECB to make the TLTRO cheaper by removing the 10pb refi spreads (currently 5bp). In addition, the volume that banks can ask for from the second TLTRO will be increased, by changing the threshold from 7% to 10% of former mortgage loans, and to raise from 3 x to 6 x the granted loans leverage. The ECB is also expected to lengthenthe maturity of the TLTRO to up to four years from inception date (rather than all expiring in Sept 2018).
The purchase of sovereign bonds remains a complicated issue among ECB members given Germany’s- and particularly the Bundesbank’s- frontal opposition. There is no consensus among ECB members about impact either. Some analysts point to it as a measure of last resort,in the event that cheap liquidity for banks and private assets purchases are not enough.
But what if Mario Draghi, now apparently cornered by his own colleagues for being a lone wolf, cannot convince the most orthodox to follow his path and the central bank does not announce anything new? What if the institution decides to play a wait-and-see game?
“Maybe the ECB won´t act on Thursday because it thinks the demand for better TLTRO conditions is not significant. Maybe it is considering changing conditions from March onwards, maybe they are more focused on asset purchases to start buying corporate bonds, maybe they believe that the ABS and covered bonds purchases program will have such a good result that there is no need to enlarge the TLTRO…”, JP Morgan analysts point out.
It is nothing new for the ECB’s governing council to be deeply divided over how to tackle the eurozone’s sluggish growth. How much of that is Mario Draghi’s, fault? How much blame can be laid at the door of the Bundesbank?? Given how market-sensitive their comments are, no one is willing to put numbers on the table for the next 24 hours.