The ECB on Thursday relaxed conditions for TLTRO III and announced new, non-targeted long-term refinancing operations in connection with its efforts to cushion the blow from the coronavirus epidemic.
The new operations – called “pandemic emergency longer-term refinancing operations”, or, “PELTROs” – will provide yet another liquidity backstop, the April statement reads. PELTROs will entail seven new refi ops, starting next month. Maturities are staggered from July to September of next year. They are fixed rate, 25bps below the average rate on the main refinancing operations.
The rate on TLTRO III will now be 50bps below the rate on main refinancing operations from June of this year until June of 2021. For lenders who qualify (i.e., hit the performance threshold), the rate will be 50bps below the average depo rate.
On QE, asset purchases were kept unchanged, as was the open-ended commitment tied to each program.
As a reminder, the ECB added €120 billion to its existing QE program at the March meeting and expanded/ enhanced its liquidity provision mechanisms. In essence, that was a stop-gap measure to buy time. Around a week later, the central bank launched the pandemic purchase program, or “PEPP”, with firepower of €750 billion.
PEPP purchases will continue until Lagarde “judges that the coronavirus crisis phase is over, but in any case until the end of this year”. This is similar forward guidance to that adopted by the Fed when it comes to the crisis. The ECB emphasizes that they are “fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed”. The nods, allusions and verbal tributes to Draghi are pervasive.
On “regular” QE, the guidance just reiterates that purchases will continue at €20 billion per month for “as long as necessary to reinforce the accommodative impact of… policy rates”.
This comes on a day when data showed the eurozone economy careened to its worst slump ever in the first quarter, on the way to what is sure to be a truly challenging Q2.
Again, that is the largest contraction since the inception of the bloc, and things are set to get materially worse, at least for a quarter.
The slump threatens the ECB’s inflation target, which has proven elusive. That gives policymakers more scope to push the proverbial envelope.
The ECB has already committed to buying more than €1 trillion in assets this year, and a recent Bloomberg survey of economists projected the figure will eventually rise to more than €1.5 trillion. Earlier this month, the ECB followed the Fed in announcing a cushion for fallen angels.
This is a Herculean task for Lagarde. During the press conference, she is sure to reiterate the absolute necessity of coordinated fiscal stimulus across the bloc.
It’s difficult to imagine just how daunting this situation must be. I suppose the only saving grace is that Lagarde’s previous job wouldn’t be all that much easier than her current occupation under these exceptionally challenging circumstances for the global economy.