Banks are not expected to take up all the long-term European Central Bank loans offered on Thursday, increasing pressure on the ECB to begin buying sovereign bonds to hit a self-imposed stimulus target.
The ECB is offering banks the cheap, four-year loans as part of a package of measures to add around 1 trillion euros to its balance sheet – a goal it has set with a view to pumping money into the economy to save it from deflation.
At 0.3 percent, inflation is far below the ECB’s target of just under 2 percent. Furthermore, a downgrade of Italy’s sovereign debt rating last week and market jitters about Greece highlight the risk of the euro zone crisis flaring up again.
A big injection of cash with the so-called targeted long-term refinancing operation (TLTRO) would help the ECB on its way to achieving its 1 trillion-euro balance sheet target, but markets expect just the opposite.
A Reuters poll of money market traders on Monday pointed to banks taking 130 billion euros ($161.10 billion) on Thursday. They borrowed 82.6 billion in a first tranche in September and can take up to 400 billion in both rounds combined.
“A low take-up (on Thursday) clearly strengthens the rationale to adopt a broad-based asset-purchase program, or QE,” said Andrew Bosomworth, a senior portfolio manager at Pimco in Munich.
A modest start to the ECB’s purchases of covered bonds and bundled loans known as asset-backed securities (ABS) — the other components of its stimulus plan — has already raised expectations the ECB will take more action early next year.
A Reuters poll on Wednesday showed growing worries that plunging oil prices will send the euro zone into a deflationary spiral. That could push the ECB to print money to buy sovereign debt early next year – a policy known as quantitative easing (QE).
ECB President Mario Draghi raised expectations when he said last Thursday that the central bank is headed for just such a step. The central bank will decide early next year whether to take further action to revive the euro zone economy, he said.
“There is a limit to which you can lead markets through forward guidance but not deliver on hints of additional measures,” Bosomworth said. “At some point in time, markets will say ‘enough!’
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