ECB accounts: technical framework for TLRO in preparation

From the ECB accounts for the January meeting of the Governing Council, it emerges that the currency guardians discussed the possible risks to the EMU’s economic outlook at some length. The most recent economic data had turned out to be weaker than ECB representatives expected. One of the factors cited as a driver of this development was the introduction of the new emission standard (WLTP) and its negative impact on automotive production. Governing Council members agreed that it was not yet conclusively clear how long the economic dip would persist. Moreover, they expressed uncertainty with regard to how this would impact on the medium-term growth outlook. ECB representatives agreed with the analysis of Chief Economist Praet that the downward risks to the Eurozone’s growth outlook have increased.

Where inflationary developments are concerned, the Eurozone’s senior central bankers continue to believe that fundamental price pressure in the Eurozone is on the rise. The driving factors here are deemed to be ongoing economic expansion and higher wage growth. At the same time, however, the currency guardians concede that – in view of the current growth dip – further information is needed to evaluate the medium-term inflation outlook properly. In this context, it should be observed that the agenda of the next meeting of the Governing Council (7 March) is set to include a revision of the ECB staff projections of economic and inflationary development, which are formulated on a biannual basis. In the wake of January’s Council meeting, there was also peripheral discussion of instruments to secure the provision of liquidity over the longer term (TLTRO). Although the currency guardians have been keen to avoid rushing into any decision on a fresh injection of liquidity, they did call for the technical parameters for monetary policy operations of this kind to be put in place promptly.

We consider it highly likely that the ECB will resolve on a fresh liquidity injection at its next Governing Council meeting on 7 March. If the economic and inflationary projections are expected to be downgraded, this would make it easier for the currency guardians to argue the necessity of renewed liquidity measures. Furthermore, we believe it is quite possible that the ECB’s senior bankers will also consider an adjustment to their forward guidance. Up until now, this guidance has indicated the likelihood of an increase in the key refinancing rate in the autumn.

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