ECB Moves Closer to Global Dovish Shift as Coeure Mulls Loans

(Bloomberg) -- The European Central Bank took a step closer to injecting fresh stimulus into the weakening euro-area economy as one of its top policy makers said discussions are under way on offering banks new long-term loans.

The comments by Benoit Coeure, the ECB Executive Board member in charge of markets, provided the strongest signal yet that euro-area policy makers are considering another round of funding. He also echoed ECB President Mario Draghi that there must be a monetary policy case for such action.

Central banks around the world are following the Federal Reserve in reining in plans to tighten monetary policy. The ECB itself has already changed its language to warn of downside risks to he outlook, while India’s central bank unexpectedly cut interest rates last week and easing inflation bolstered bets that more reductions could be on the cards.

With the euro-area outlook deteriorating, the ECB is expected to cut its economic growth forecasts at its next meeting in March. That gathering is also at the center of speculation about new loans, known as TLTROS.

“I can see that there is a big discussion in the market of adding a new, as we call it, TLTRO, targeted long-term refinancing operation,” Coeure said. “It is possible. We are discussing it, but we want to be sure that it serves a monetary purpose.”

ECB Moves Closer to Global Dovish Shift as Coeure Mulls Loans

Investors responded to the comments by sending the euro lower, briefly touching its weakest level since November and trading at $1.1268 as of 5:14 p.m. in Frankfurt. Banks have suggested they would like another round of the cheap funding, and stock prices increased. The Euro Stoxx Banks index rose on Friday, taking its gain for the week to more than 4 percent.

Federal Reserve policy makers in January backed away from raising interest rates while they assess how headwinds from a cooling global economy and tighter financial conditions affect their otherwise constructive outlook for continuing solid U.S. growth.

In the euro zone, officials need to make sure that any loan offering will help to maintain favorable credit conditions in the 19-nation bloc, Coeure told an audience in New York.

The economic slowdown is “clearly stronger and broader” than the ECB expected, which means the inflation “path also will be shallower,” he said. “We have to adapt to that.”

More than 720 billion euros ($813 billion) in current four-year TLTRO financing is outstanding and will start to mature in June next year. Banks have signaled to the ECB that an expiration of the loans would force them to seek alternative funding, which could lead to an increase in lending rates for consumers and companies.

Coeure dismissed the idea that the ECB would offer new loans in order for banks to meet regulatory requirements.

“That’s not a good argument, because that’s not a monetary-policy argument,” Coeure said. “Banks should stand on their own feet, and they should build their liquidity buffers by themselves.”

What Our Economists Say: 
In the ECB minutes, “more important could be any references to the TLTRO program, which we expect will need to be refreshed this year. Without action, the ECB’s balance sheet will shrink and that could prompt an unwelcome tightening of financial conditions.”

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