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Targeted LTRO Clarification But No More Action

Published 07/02/2014, 08:19 AM
Updated 03/19/2019, 04:00 AM

• Euro area PMI composite fell to 52.8 in June
• Inflation and bank lending are main concerns
• New policy measures unlikely

The last couple of European Central Bank (ECB) meetings have been eventful, with the president Mario Draghi promising action in May and then delivering on that pledge at the meeting of the Governing Council in June. Both stocks and currencies responded with (relatively) heavy movement to both those events, with EURUSD moving 160 pips intraday on May 8 and 167 pips on June 5. In comparison, the average intraday range in May and June was 59 pips.

ECB key policy rates

Held up against these two central bank announcements (and subsequent press conferences) this week's meeting of the Governing Council (GC) could be rather subdued. Economic data has not changed much over the past month. The euro area PMI composite fell to 52.8 in June from 53.5 in May, resulting in a quarterly average of 53.4 vs. 53.1 in Q1. Readings around the 53 level are consistent with quarterly GDP growth of 0.3 to 0.4 percent, with consensus currently predicting 0.3 percent. The broad eurocoin index, a euro area counterpart to the Chicago Fed national activity index, was unchanged at 0.31 in June for a quarterly average of 0.34, suggesting that growth in the euro area was actually a bit above trend growth in Q2. Put differently, the recovery remains on track but its speed is anything but impressive.

Chart 2 Inflation and bank lending are primary concerns of the ECB at the moment, and data released in the past month did not help to assuage the concerns. Consumer inflation was unchanged at 0.5 percent in June, according to Eurostat, though core inflation did rise a little to 0.8 percent, while private sector (non-financial) loans dropped 2.6 percent year-on-year in May following a drop of 2.8 percent in April. Chart 3 The June announcements of rate cuts (main refinancing rate: 0.15 percent, deposit rate: -0.1 percent, and marginal lending rate: 0.4 percent), new rounds of targeted long-term refinancing operations (targeted LTROs) and suggestions of upcoming action in the ABS market were more than anticipated, but clarification regarding the latter two are still needed. I expect ECB president Mario Draghi to use his press conference to further clarify the details of the targeted LTROs with an outside chance of comments regarding the ABS market as well. In particular, clarification of the net lending criterion of the targeted LTROs could – and should – be elaborated further upon by Draghi at the press conference. I do not expect new policy measures to be announced.

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