ECB’s cheap credit will return this year, says Credit Agricole

The ECB conducted its last TLTRO bid in December

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According to Credit Agricole SA, the European Central Bank will reverse plans to dissuade banks from cheap credit.

The ECB could announce targeted long-term refinancing operations, known as TLTROs, as early as July, said Louis Harreau, rates strategist at the Paris-based lender. This would reinstate the policy instrument less than a year after its completion.

The operations were introduced a decade ago to help banks weather the region’s debt crisis and were a key part of easing financial conditions. To unwind its super-loose policy in the face of record-high inflation, the ECB conducted its final TLTRO bid in December.

However, Harreau expects the bank to pump out cheap liquidity again to support financial institutions now grappling with the prospect of higher borrowing costs. The money markets are betting that the ECB will raise the deposit rate from the current minus 0.5% to 0% by the end of next year.

“In the post-Eurozone sovereign debt crisis, we doubt the ECB will be able to complete its TLTRO.” The injections total €2.2 trillion, about half of the total free cash floating around in the banking system.

The most recent TLTRO iteration offered a sweeter rate if certain lending criteria were met, ending in June, raising fears of a sharp drop in excess liquidity should banks decide to return the money afterwards. This helped push the premium on 12-month financing to the highest level in almost two years versus current interest rates last month.

The ECB could announce details of an extension of its cheap credit program as early as July, with the first of four new quarterly funding rounds starting in December, Harreau said.

Policymakers will “continue to monitor banks’ funding conditions and ensure that the maturity of TLTRO III operations does not impede the smooth transmission of our monetary policy,” President Christine Lagarde said after the ECB’s rate decision in December.

Harreau said the easy credit should become a permanent policy tool. “Regular, pre-arranged conduct of operations would reduce uncertainty and ensure banks are able to lend to the private sector on the best possible terms,” ​​he added.

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