FRANKFURT (Reuters) - European Central Bank policymakers are likely to debate new multi-year loans to banks, a potent stimulus tool, in the months ahead as they navigate a “fragile and fluid” global context, minutes of their December meeting showed on Thursday.
A five-year economic expansion in the euro zone is rapidly losing pace as weak demand from China takes a toll on the bloc’s top exporter, Germany, while France and Italy pay the price of home-brewed political woes.
This is complicating the ECB’s plans to dial back its aggressive stimulus policy, which helped bring the bloc back from the brink of deflation in 2016 but is out of sync with the current moderate but steady price growth.
The central bank wrapped up its 2.6 trillion euro ($3.00 trillion) bond purchases at the Dec. 12-13 meeting but ECB President Mario Draghi couched his policy message in warnings about growing risks, such as trade tensions between Washington and Beijing, and weaker economic data.
Minutes of the discussion suggested some policymakers would have liked Draghi to be even more cautious and at least some called for a discussion on a new round of cheap credit to banks — a key source of funding for lenders in Italy, Portugal and Spain.
This confirmed Reuters reports and was likely to cement market expectations for a new Targeted Long-Term Financing Operation in some form in the coming months.
“Looking ahead, the suggestion was made to revisit the contribution of targeted longer-term refinancing operations to the monetary policy stance,” the ECB said in its account of the December meeting.
A new TLTRO would also help banks meet a regulatory requirement to have a certain amount of multi-year funding in place, known as the Net Stable Funding Ratio, and prevent a “cliff edge” as the previous round nears maturity in 2021.
Some rate-setters called for the ECB’s policy message to say that risks to economic growth in the euro area were “tilted to the downside” — a phrase that has in the past signaled easier policy ahead.
In the end the ECB opted for a compromise solution, where risks were described as being balanced but “moving to the downside”. But the minutes laid bare a cautious attitude among rate-setters.
“It was underlined that the situation remained fragile and fluid, as risks could quickly regain prominence or new uncertainties could emerge,” the ECB said in the minutes.
The minutes also suggested that policymakers’ view of when the ECB’s first rate hike since 2011 will come chimes with expectations among investors. The likely timing as indicated by market pricings had been pushed back to late 2019 before the December meeting and is currently seen only sometime in 2020.
The ECB said last year that interest rates would stay at their current, record low level at least through the summer of 2019.
The ECB’s stance chimed with the dovish message delivered by the U.S. Federal Reserve in its own minutes on Wednesday.
Rate-setters there said they would wait to deliver more interest rate hikes until they had a better handle on whether slowing global growth and financial market volatility would hurt the domestic economy.
Reporting by Francesco Canepa; Editing by Catherine Evans