MNI PREVIEW: ECB To Boost PEPP, TLTRO Loans For Banks

The European Central Bank is set to boost its asset purchases and cheap loan programme for banks at its meeting on Thursday as the eurozone suffers a resurgence of Covid infections and inflation remains stubbornly below zero.

Although giving no clue as to the scale of the package to be announced on Dec. 10, Executive Board members including President Christine Lagarde have made it clear the main tools for delivering additional stimulus and ensuring financing conditions remain accommodative for as long as needed will be its Pandemic Emergency Purchase Program (PEPP) and Targeted Longer-Term Repo Operations (TLTRO).

ECB sources have told MNI PEPP purchases could be extended by around EUR 500 billion to a total of EUR1.85 trillion, with a strong chance the upper end of the envelope could be increased to EUR2 trillion to give the announcement greater impact.

DURATION KEY

While bond traders will focus on the headline PEPP increase, the ECB will be keen to highlight an extension to its duration -- with the program to last at least an additional six months to December 2021 and possibly through to June 2022.

This, policymakers will stress, should keep financing conditions at acceptable levels and avoid any freeze in bank lending.

TLTROs will also see a recalibration, being extended from the current June 21 end date for at least another year. The ECB could further ease the cost of borrowing for banks meeting lending targets under the programme by introducing additional levels of tiering up to the cheapest borrowing rate at 50bps below the Deposit Rate.

OTHER TOOLS

There is only an outside chance the ECB could lower the Deposit Rate from -0.50%. Many Governing Council members do not see it as the tool of choice for current circumstances.

Although Executive Board members Isabel Schnabel, Philip Lane and Fabio Panetta have all pointed to the PEPP and TLTRO for Thursday's meeting, they stress that every weapon in the ECB's armoury could be used in the recalibration.

Other tools include the Asset Purchase Program, with some suggestions the ECB could extend its current EUR20-billion-a-month purchases for a further six months beyond the current planned December ending for new purchases. The APP could also see an extension of the planned period for reinvestment of maturing bonds.

With the euro rising above USD1.21, the ECB is also likely to repeat concerns about the currency's strength.