ECB Monetary Policy after the TLTRO

The second TLTRO of the ECB, on December the 11th, has brought EUR 129.8bn of liquidity on the market. This will not be sufficient and the European monetary authorities will have to put in place new instruments, probably at the next ECB meeting on January the 22nd.

Two remarks on the ECB monetary policy
1 – The ECB has two instruments: interest rates and liquidity. The first is close to 0 at 0.05% for the refi rate. The ECB is constrained by the Zero Lower Bound. To reach a more accommodative monetary policy the ECB will have to increase liquidity to the financial and banking sector. Last November Mario Draghi took a formal commitment to increase the ECB balance sheet by EUR 1 000bn by the end of June 2016. It will then converge to the level seen in March 2012. The main reason for this liquidity is the will to rapidly curb inflation expectations
2 – In the ECB monetary policy framework, liquidity injections are temporary. It’s true for short-term operations but it is also what is seen for longer operations. Currently 2 operations that have been done, one at the end of 2011 and the other in February 2012 are reimbursed now. Their duration was 3 years. It’s an important difference with what is done by the Fed where long-term operations are purchases.

The operation of December the 11th has increased liquidity by EUR 129.8bn. With the previous operation of September the 18th which provided EUR 82.6bn the total amount is EUR 212.4bn. This is way below the EUR 400bn targeted by the European monetary authorities and announced at Draghi’s press conference on June the 5th (see here paragraph 6). Continue reading