First, ignore the noise in inflation this year due to a combination of factors (new HICP weights; imputed prices; taxes; seasonal sales). The ECB will look through this unusually high volatility, focusing on the 2022-23 outlook.
Second, the inflation outlook remains subdued due to weak demand and high uncertainty. The ECB's approach isn't *that* different from the Fed's: "the generation of sustained wage pressures requires a labour market that is sufficiently hot". #HighPressureEconomy
Third, inflation expectations have stabilised but this is largely the result of developments in the US and global risk appetite. Nice updated charts showing the rise in the inflation risk premium and the impact of higher oil prices.
All this backs the ECB's strategy to preserve favourable financial conditions, as explained by @Isabel_Schnabel in her recent speech. Dovish conclusion from Philip Lane on the second stage of the monetary policy response to come.
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Big number!
425 banks took €330.5bn in ECB's TLTRO-III.7 operation, highest since June.
A positive sign for the banking sector and the real economy.
/thread
This large take-up will result in a €315bn increase in total TLTRO borrowing (to €2080bn excluding PELTROs) after €15.7bn mature from the final TLTRO-II.4 next week.
€330.5bn represents a 18% increase in total TLTRO borrowings vs. a 10% increase in borrowing capacity following the ECB decision (from 50% to 55% of eligible loans). It suggests that banks in the core have increased their borrowing more than proportionally.
Remember TLTROs?
The take-up at the 7th operation (TLTRO-III.7) will be published tomorrow at 11:30 CET. It will be the most important operation since June 2020 (when a record €1.3tn was allotted) as the ECB eased TLTRO conditions in December. (1/n)
The ECB increased TLTRO borrowing allowance from 50% to 55% of eligible loans (adding €290bn), and added three new operations between June and December 2021. Most importantly, the interest rate discount period was extended by one year, to June 2022. (2/n) ecb.europa.eu/mopo/implement…
Here’s the outstanding amounts of TLTRO borrowing by country as at end-January.
Total borrowing was €1792bn, or 56% of total allowances. Belgium (88% of allowances), Spain (74%) and Italy (73%) were among the largest TLTRO users. (3/n)
ECB QE data is out!
Bulk of PEPP still in public debt securities (93% of the €700bn so far).
A chartstorm 👇
Before we dig into monthly QE across countries and markets, last week's PEPP purchases were the largest in almost 6 months (€21.3bn).
Could be catch-up, could be that the ECB wanted to send a signal ahead of this week's meeting, but more likely front-loading before Xmas break.
ECB QE monthly data: stabilising ahead of Christmas break.
Average monthly PEPP was €66bn in Oct-Nov, of which €70bn per month in public debt (as CP holdings declined by €8bn).
The ECB's focus will be on the *duration* of policy support
more than on the *intensity* of asset purchases. The ECB could extend PEPP & TLTROs for even longer, although the consensus will have moved closer to our view by now. (2/n)
In order to extend the PEPP to June 2022, the ECB will need to increase its size by €450-850bn, so they could also surprise with a larger number (>€600bn).
We expect flexibility on both sides: the envelope might not be used in full, but they'll be ready to do more. (3/n)
A few charts from the @ecb Financial Stability Review.
1. Total net funding of euro area households, firms and sovereigns, including various EU support schemes ecb.europa.eu/pub/pdf/fsr/ec…
2. Bank loans to euro area corporates: more than 7% are affected by state guarantees, and 14% by moratoria.
3. Banks' Net Interest Income contracting due to margin compression. Overall profitability markedly lower due to loan loss provisioning too (though lower than predicted).
The rapid deterioration in macro/financial conditions will put a great deal of pressure on the ECB on Thursday.
How can they hint at an increase in asset purchases without saying it? What else could @Lagarde say or do? (1/n)
Even before the second virus wave hit, there was little doubt that the ECB would need to ease again by year-end, based on the PEPP's dual function, Philip Lane's “two-stage approach” and Fabio Panetta’s “asymmetric reaction”. (2/n)
The ECB will likely postpone a decision to December based on the updated/extented staff projections, aiming at a broader consensus. But now that downside risks are materialising, @Lagarde needs to do more than just “send a signal” to markets on Thursday. (3/n)