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ECB's headquarters in Frankfurt.

The Shadow Council members see no need for the ECB to change its course to react to the situation in Italy.

(Foto: dpa)

ECB Shadow Council Too early for more TLTROs

Members argue that it is premature to undertake another round of TLTROs.
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Some would support such multi-year loans at a later stage to buffer against a drop in financing – while others oppose them in principle. The members would continue to link reinvestments to the capital key of the central bank but keep as much flexibility as possible by doing that.

Growth forecast strongly revised downward – Inflation expected to fall

Compared to three months ago, members of the ECB Shadow Council revised up their inflation forecast to 1.8 percent from 1.7 percent for 2018. Their forecast for 2019 was unchanged at 1.6 percent. Members revised down their 2020 forecast to 1.5 percent from 1.6 percent.
The Shadow Council revised down its mean forecast for this year’s GDP growth to 1.9 percent from 2.1 percent, below the ECB’s staff projections from September. Members revised down their 2019 forecast to 1.5 percent from 1.7 percent, and revised down their average forecast for 2020 to 1.6 percent from 1.7 percent.

Shadow Council macroeconomic forecasts (ECB’s September projections in brackets)
HICP-Inflation*GDP-Growth
20181.8 (1.7)1.9 (2.0)
20191.6 (1.7)1.5 (1.8)
20201.5 (1.7)1.6 (1.7)

Contributors: M. Annunziata; A. Bosomworth; S. Broyer; W. Buiter; J. Callow; J. Krämer.

*Harmonized Index of Consumer Prices, a weighted average of price indices of eurozone countries.

Too early for further TLTROs
Shadow Council members argue that it is premature to authorize another round of Targeted Longer-Term Refinancing Operations (TLTROs). One reason is that they could be seen as a measure to support Italian banks, given the current situation in Italy. Even though some members would support further TLTROs at a later stage. Banks have used part of the capital from TLTROs to fulfill their regulatory liquidity requirements. The proponents argue that that the expiration of the most recent TLTROs in June 2020 would affect the banks’ regulatory requirements in mid-2019, and that some support is needed to deal with a cliff effect at that time. Others argued that there is no monetary case for more TLTROs in the current environment of credit growth and historical low borrowing costs. One member mentioned the possibility of indexing the interest rate of future TLTROs to the main refinancing rate.

Sticking to capital key while maintaining flexibility
Regarding the reinvestment policy for maturing bonds, the members would continue to link reinvestments to the ECB’s capital key but with maximum flexibility. A new key for subscription to the ECB’s capital will apply from January 1, with 16 central banks having a higher share than before and 12 having a lower share. One member stressed that the reinvestments cannot be strictly allocated by the capital key given the scarcity of German and Dutch bonds. He argued that the allocations that cannot be filled should fall to the countries next in line in the ranking, according to the new capital key.

Most members want the reinvestments to be neutral in terms of the maturity structure for now. They see no need to shift purchases towards the long end, at least for the moment.

Flexibility in the first rate hike
Some members argued that the ECB should emphasize that its commitment to keep interest rates on its current level at least until the summer next year does not mean that there will be a rate hike in autumn 2019 or thereabouts, and that any decision depends on the state of Europe’s economy. One member said that in light of the recent downside surprises on growth and inflation, the ECB should push the timing of the first rate hike towards early 2020. Some members also expressed concern that there could be an economic downturn soon and that the ECB and euro-area would not be sufficiently prepared for that case.

MemberAffiliationFixed rate        Deposit rate
José AlzolaThe Observatory GroupUnchanged       Unchanged    
Marco AnnunziataAnnunziata Advisors UnchangedUnchanged        
Elga BartschBlackrockUnchangedUnchanged    
Andrew BosomworthPimcoUnchangedUnchanged       
Sylvain BroyerS&P Global RatingsUnchangedUnchanged                  
Willem BuiterCitigroupUnchangedUnchanged                 
Jacques CaillouxRokos CapitalUnchanged   Unchanged                   
Julian CallowElement CapitalUnchangedUnchanged      
Janet HenryHSBCUnchangedUnchanged             
Merijn KnibbeWageningen University+0.25+0.25      
Fabian LindnerIMK UnchangedUnchanged 
Jörg KrämerCommerzbank +0.25+0.25
Thomas MayerFlossbach von Storch+0.25 +0.4
Lucrezia ReichlinLondon Busines School UnchangedUnchanged 
Richard WernerUniversity Southampton +0.5                   +0.5                   

Frankfurt, Germany
December 8th, 2018
Written by Jan Mallien
Proofed by Jeremy Gray

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