ECB Can Renew Free Loans to Banks If Needed, Council Member Says

  • Lithuanian central-bank head comments in Bloomberg interview
  • Says it’s too soon to discuss QE end or changing rate guidance

The European Central Bank could consider renewing its offer of free long-term liquidity to lenders though it shouldn’t turn it into a permanent measure, a Governing Council member said.

Targeted longer-term refinancing operations are “a very practical and very helpful instrument; I would be very flexible regarding that instrument in the future,” Bank of Lithuania Governor Vitas Vasiliauskas said in a Bloomberg interview in Vilnius on Tuesday. “I still think that TLTROs are not an ordinary monetary policy, that they remain an emergency tool.”

Vitas Vasiliauskas

Photographer: Peter Kollanyi/Bloomberg

The ECB is scheduled to offer the last of its long-term loans to banks next month, raising the prospect that it might announce fresh operations to smooth its monetary policy in a year of heightened political risk. The measure, while less well-known than negative interest rates and the 2.28 trillion-euro ($2.4 trillion) bond-buying program, has been a key plank of the institution’s stimulus efforts to reinvigorate the euro-area economy.

Banks have borrowed about 570 billion euros so far in the TLTROs, which provide them with liquidity for as long as four years if they intend to use it for loans to companies and households. An initial eight quarterly operations started in 2014 and another four were added in 2016 on more favorable terms. The latest program provides cash at the main refinancing rate, currently zero, and reduces that to as low as the deposit rate of minus 0.4 percent if the banks increase credit provision. That means the ECB potentially pays lenders to take its money.

Credit Judgment

The last allotment is scheduled for March 23. The Governing Council, which has said little on the program recently, next sets monetary policy on March 9.

Vasiliauskas, 43, said the TLTROs could be renewed if, for example, the credit outlook worsens. While the ECB judged at its last meeting that credit standards are broadly stabilizing and demand is expanding, it also said those conditions are significantly supported by monetary stimulus.

“If there would be a need for it, why not? There could be for example drastic changes in lending -- which we don’t see right now -- but if so, why not?” Vasiliauskas said at the Lithuanian central bank. Even so, he stressed that “a healthy system in normal times should be financed by the markets.”

TLTROs could also provide a way to smooth the ECB’s exit from quantitative easing when it decides to take that step. Policy makers are starting to think about how they might communicate such a move without destabilizing markets, while signaling that they’re not yet ready to hold any formal talks on the topic.

See more on the challenge of communicating the end of exceptional stimulus

Vasiliauskas agreed that it’s too soon to discuss tapering or changes to the central bank’s forward guidance. He cited risks including elections in the Netherlands, France and Germany; the U.K.’s negotiations over its exit from the European Union; U.S. economic policy under President Donald Trump; and China’s debt burden.

“It would be pretty premature,” he said. “We can see some downside risks when we look at the balance of risks.”

Euro-area inflation accelerated to 1.8 percent last month, near the ECB’s goal of just under 2 percent. Vasiliauskas said that was largely due to energy costs and he’s watching measures such as core inflation, wages and services prices to assess whether the pickup will be sustained.

“I see positive signals, I see light in the tunnel, but I don’t see sustainability yet,” he said. “We avoided a deflationary situation but we still have a long way to go before reaching our goal.”

— With assistance by Carolynn Look

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