ECB under pressure after poor TLTRO take up

The European Central Bank's (ECB) so-called targeted long-term refinancing operations (TLTROs) fell slightly short of consensus on Thursday, increasing the pressure for the Eurozone monetary authority to take additional action at its next policy meeting.

The take up by the 306 European banks that participated in this second round of liquidity ended up at €129.84bn. Market expectations for the take up ranged from as little as €90bn to €250bn with consensus centring around approximately €150bn.

Back in September in the first TLTRO operation a total of only €83bn was taken up. That was well below market expectations.

The ECB's original goal was to loan out a total of €400bn in both operations, compared to this final number of approximately €213bn.

EXPERTS EXPECT ECB ACTION

The consensus of analyst commentary after these results clearly pointed to increased pressure on the central bank to embark on more stimulus measures.

BNP Paribas pointed out that €257bn in liquidity that was issued from the 2011-12 long-term refinancing operations (LTROs) is due to be repaid in 2015.

With the amount of the TLTRO take up being lower than the monies to be repaid next year, the French broker explained that “the ECB's balance sheet size will decline, in contrast with the €1trn rise” that was the central bank's goal.

BNP thus expects the ECB to “announce broad based asset purchases in it January meeting along with the modalities of the programme, which we expect to include the purchase of sovereign bonds”.

Capital Economics titled its own note with the conclusion that the “low ECB loan uptake should seal the deal on QE (quantitative easing)”.

“In all, the ECB will need to start buying sovereign debt very soon if it is to expand its balance sheet as planned and reduce the threat of deflation,” these experts said, adding that they also expect an initial tranche of sovereign debt purchases of “around €250bn” in January.

Lastly, Berenberg said that the ECB will add “additional” assets to its purchase target in the first quarter of 2015.

“We see an 80% chance for corporate bond purchases to be announced at the 22 January or 5 March meeting and a 65% chance for sovereign bond purchases,” the German broker specified.

MARKET REACTION

After an initial move to the upside, European stock markets slipped into the red. At 11:48 London time, the benchmark Eurostoxx 50 traded down 0.14%.

In currency markets, the euro showed strength turning around in its trade against the dollar and moving up further against the pound.