Eurozone banks declined to fill their boots with cheap liquidity offered by the European Central Bank (ECB) this month, heaping pressure on Frankfurt to take more radical action to lift inflation in the single-currency bloc.
Two hundred and fifty five banks took up €82.6bn (£65bn) of the €400bn of cash on offer in the first targeted longer-term refinancing operation (TLTRO) this month, the ECB reported yesterday. That was much lower than the €174bn that analysts had expected financial institutions to accept.
Some analysts said that the weak demand for the four-year money reflected a lack of appetite among banks to lend to European companies and predicted it was now more likely that the ECB president Mario Draghi and the rest of the central bank’s council would need to enact a programme of sovereign bond purchases to lift inflation, which drifted down to just 0.4 per cent in August.
“The fact that banks have borrowed relatively little suggests that they have little intention of increasing their lending, either because of their own risk aversion, a lack of demand for loans, or most likely both,” said Jennifer McKeown of Capital Economics. “We maintain our view that a broader programme of asset purchases, or quantitative easing, will be needed to get the economy going and avert the risk of deflation.”
Holger Schmieding of Berenberg bank said the result was “disappointing” for the ECB, adding that it “will likely strengthen the voice of those who argue that, to really make an impact, the ECB would have to buy major amounts of sovereign bonds”.
“This low figure is making the probability of fully blown QE much higher,” said François Lavier, a fixed-income fund manager at Lazard Frères Gestion in Paris.
However, other economists said that take-up of the cheap funding is likely to pick up. The next TLTRO, out of a total of eight, will be held in December. That will be after the results of the ECB’s stress tests of the Continent’s banks are reported next month. Banks may be more inclined to increase their balance sheets at that stage.
“There may be a stigma because the markets are waiting for the AQR [asset quality review] in a few weeks,” said Karel Lannoo of the Centre for European Policy Studies.
The TLTRO, which was announced in June, is similar to the Bank of England’s Funding for Lending Scheme. It allows banks to borrow at just 0.15 per cent until late 2018 provided they meet targets for lending to businesses. If they miss these targets, the banks must pay the funds back in 2016.
Earlier this month Mr Draghi said that the TLTROs, combined with a large programme of purchases of asset-backed securities and covered bonds, would take the eurozone’s balance sheet back to 2012 levels of around €3 trillion and help lift inflation back to the ECB’s inflation target of just below 2 per cent.
Speaking at the central bankers’ summit in Jackson Hole, Wyoming, last month, Mr Draghi said he was prepared to use “all the available instruments” to lift inflation expectations. And there were some signs of rising market anticipation of a buying programme in the bond markets yesterday, with the price of Portuguese and Spanish bonds drifting up and their yields falling.
The ECB’s vice president, Vitor Constancio, predicted yesterday that the total take-up of the TLTROs will be “significant”.
At least 40 per cent of the funds in the September round went to Italian and Spanish banks, according to the Bloomberg news service.
Consumer price inflation in the eurozone in August was the lowest since the global financial crisis in 2009.Reuse content