ECB may extend the program of cheap loans to banks

ECBEuropean Central Bank (ECB) could consider renewing the supply of cheap long-term loans to banks, but this tool should not be transformed into a permanent measure, according to Vitas Vasiliauskas, who is a member of the Governing Council of the ECB and Governor of the Bank of Lithuania.

“The targeted longer-term refinancing operations are very practical and very useful tool. I was flexible with regard to this tool in the future”, said Vitas Vasiliauskas. “However, I think they are not a traditional tool of monetary policy and must remain a measure of emergency”, said the Governor of the Bank of Lithuania.

The ECB is about to release the latest series of long-term cheap loans to banks next month. The words of Vasiliauskas increase the likelihood that bank will announce new operations to ease its monetary policy in a year of increased political risk. The tool is less known than the negative deposit rate and the program to purchase bonds worth 2.28 trillion EUR.

So far, withing the targeted longer-term refinancing operations the banks borrowed 570 billion EUR, which should ensure liquidity for at least four years if they intend to use them for lending to companies and households. In 2014, were launched on eight quarterly operations, and in 2016 were added four more in it at more favorable terms.

The last program provide liquidity at an interest rate equal to the current interest rate on the main refinancing operations, namely 0%. However, he could drop to the level of deposit rate (-0.4%) and banks to increase their share of the funds will used for lending. This effectively means that in some cases the ECB will pay the banks to give them loans.

The next operation for targeted longer-term refinancing operations (TLTRO) is scheduled for March 23. The Governing Council, which recently has not commented instrument will be meeting on monetary policy on 9 March

In words of Vasiliauskas the loans under the program TLTRO can be renewed if, for example the prospects for lending in the Eurozone worsen. At its last meeting the ECB expressed the view that credit standards rather stabilize and demand is growing. Moreover, according to the bank these conditions are further supported by monetary stimulus.

“If there is such a need, why not? Can for example have drastic changes in lending we do not see now, but if there – why not?”, said Vasiliauskas. However, he stressed that “a robust system in normal times would have to be financed by the markets”.

Moreover, the program TLTRO need to ensure a smooth final of quantitative easing when the ECB decided that to happen. Vasiliauskas stated that it was too early to think about shrinking the program for incentives or changes in estimates of banks. He notes risks such elections in the Netherlands, France and Germany, negotiations Brexit, the policy of US President Donald Trump and indebtedness of China.

Eurozone inflation accelerated to 1.8% last month, which is close to the target level of the ECB. The Governor of the Bank of Lithuania reiterated that the increase is largely due to more expensive oil and said that after measures such as core inflation, wages, prices of services, to determine whether the increase is sustainable.