ECB’s Schnabel: Surveys Indicate TLTRO III Take-Up Around €1.4 Trn

10 June 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank sees well over €1 trillion in demand for its targeted lending operations, ECB Executive Board member Isabel Schnabel said Wednesday. In remarks made at an online seminar hosted by the Florence School of Banking & Finance, Schnabel, according to a text provided by the ECB, said that under high uncertainty, central banks must pre-empt the materialisation of risks. Noting the ‘highly favourable’ terms on which banks can obtain ECB funding, Schnabel said that ‘surveys point to significant take-up for TLTRO [targeted longer-term refinancing operations] III, in the order of €1.4 trillion’. On June 18, the ECB will publish results of the first allotment of the third series of TLTRO III since easing conditions on April 30 ‘in order to support further the provision of credit to households and firms in the face of the current economic disruption and heightened uncertainty’. In an interview on Tuesday, Schnabel had been more cautious, predicting only that the take-up would be ‘sizeable’ and saying the operations would be a success ‘if banks use the funds to grant loans to the real economy’. Under conditions such as ‘the current exceptional degree of uncertainty’, Schnabel said, monetary authorities must ‘take action before the risks materialise to shelter the economy from further and deeper harm’. In particular, they must counter tail risks, she added. For this reason, and notwithstanding reduced financial market stress, the Governing Council was unanimous last week in its view that ‘further strong policy support was needed to prevent medium-term inflation from moving further away from our inflation aim’, she said. The Council considered the pandemic emergency purchase programme (PEPP) to be the most appropriate tool at the ECB’s disposal, Schnabel said. ‘With its inherent flexibility, PEPP is best suited to address the dual objective of countering fragmentation in the euro area and closing the medium-term inflation gap that has emerged from the COVID-19 pandemic’, she affirmed. Schnabel pointed to the euro area GDP-weighted yield curve as evidence of the PEPP’s effectiveness, citing the downward shifts following the PEPP’s announcement on March 18 and the Governing Council’s decision last week to boost the PEPP’s original €750 billion volume by €600 billion. The curve is today ‘not far from the level we observed before the outbreak of the crisis’, she said. The ECB’s newest measures constituted ‘an appropriate and proportional course of action’, Schnabel said. Such a judgment, she said, has to include a consideration of the potential for expectations of low inflation to become entrenched. Fiscal policy is contributing to mitigate this risk, however, and household inflation expectations ‘signal very limited risks of second-round effects’, in contrast to financial markets’ currently heightened perception of deflation risks over the next five years, she argued.