New TLTRO loans for banks must have a monetary justification, ECB officials say

Two European Central Bank officials who spoke over the weekened appeared to be trying to temper market expectations, to varying degrees, for additional policy easing.

In an interview with Spanish daily El Pais, which was published over the weekend, ECB Governing Council member, Francois Villeroy de Galhau, said the central bank could shift its policy bias in favour of further easing if officials decided that the recent slowdown in economic growth will be more "durable".

But for now that remained to be seen, he said, even as he described the soft patch in growth as "significant".

It was too soon to say how "temporary" or not it would prove to be, with the outlook for the German economy holding the "key".

As for many other economic offcials, both in the euro area and beyond, for De Galhau the main driver behind the slowdown was the uncertainty worldwide sparked by trade protectionism.

The central banker also poured cold water on concerns that recession risks were on the rise, telling El Pais: "I don't think so. In three of Europe's main economies - Germany, France and Spain - domestic demand is resisting. Wages are rising, which in turns feeds consumption and growth."

"Italy's situation is different," he added.

Regarding a 'no deal' Brexit and what its potential impact on the Eurozone might be, De Galhau said it would be "bad news" for everyone, but especially for Britain, although financial instability could be avoided.

Indeed, both the ECB and the Bank of England had already agreed on the measures that might be needed in order to forestall instability.

Finally, when queried about the assertion by ECB chief, Mario Draghi, that rate-setters were ready to act if needed, De Galhau said the central bank could be "extremely efficient" by using the three tools at its disposal: its €2.6trn balance sheet, interest rates and liquidity facilities.

But he stressed that recourse to those tools could only be justified by considerations related to monetary policy and not so as to help specific banks or jurisdictions.

His remarks were echoed by Finnish GC member Olli Rehn.

In another interview, with Handelsblatt, Rehn said the ECB needed to have a "clear and convincing monetary policy case" before approving another round of long-term liquidity loans for lenders in the single currency bloc, which are known as Targeted Long-Term Refinancing Operations.

Rehn reportedly also urged Germany to invest more in its digital and traffic infrastructure.

There were roughly €720bn-worth of four year TLTROs outstanding, which were set to start coming due in June 2020 and might possibly force some lenders to look for funding elsewhere if the ECB did not provide new loans.

However, he declined to comment on the shift in market expectations for the first ECB rate hike to later in the year or 2020.

"I don't comment on market developments," he reportedly said.

"But our monetary policy orientation is clear. We have said that rates will be at their current level until we have sustainably reached our monetary policy goal."

On 15 February, ECB executive board member had admitted that new TLTROs were under discussion.

Coeure, who had been addressing an audience in New York, said: "I can see that there is a big discussion in the market of adding a new, as we call it, TLTRO, targeted long-term refinancing operation.

"It is possible. We are discussing it, but we want to be sure that it serves a monetary purpose."