(Bloomberg Opinion) — The European Central Bank has surprised investors by moving early on a new package of monetary stimulus. But when you look at what’s within the box, the gift is a lot less generous than what it could have been. Mario Draghi has preferred to make a small step earlier, rather than moving later in a more decisive way. The ECB president has also wanted to keep everyone on board, which clearly limited the scope of what he could do.
The announcement that the ECB would launch a new round of targeted cheap loans and delay its first rate hike had the flavor of a shock-and-awe measure. Investors had been expecting a hint of the next moves to come — but perhaps not more than that.
The outcome lies somewhere between the two. Draghi said that several members of the Governing Council had advocated postponing the first rate increase to March 2020, but the ECB settled for the end of the year. Most importantly, the “targeted long-term refinancing operations” — cheap loans which also hinge on banks meeting some lending targets — were less generous than they could have been. Banks can now borrow for two years, as opposed to a previous duration of four, and the interest rate will be indexed to the main refinancing rate over the life of the operation, which is now at zero percent. In the past, it was as low as the deposit rate, which stands currently at minus 0.4 percent.
Most importantly, investor expectations for the third round of TLTROs to be available from June have been dashed. TLTRO II expires in June 2020, which means that as of June 2019, any funding with less than a year to maturity will no longer count for the net stable funding ratio, a regulatory requirement for liquidity. The cost for banks to meet this Basel rule will rise, as they will be less able to rely on the funds that have been showered upon them by the central bank. For weaker lenders in particular, this is unwelcome news. Little wonder bank shares did so badly in the aftermath of the announcement, as did equity indices.
Why was Draghi so mean this time? One reason is the uncertainty surrounding the euro area growth outlook. The ECB cut sharply its growth and inflation forecasts and maintained that risks continued to be tilted to the downside. However, officials remained adamant that the euro zone will not fall into a recession. There remain some significant positive factors, including sustained wage growth and good financing conditions. The outlook could improve or worsen suddenly, depending on external factors such as the ongoing trade dispute between the U.S. and China. “In a dark room you move with tiny steps. You do not run, but you move,” Draghi said. Since the ECB preferred to act early rather than wait, it had to limit its action. This makes sense, given the uncertainty around the future.
The other element was the variety of views within the Governing Council. While the traditional hawks, including Bundesbank President Jens Weidmann, have sounded more dovish in recent weeks, there was no doubt a divergence of views, as emphasized by the discussion over the required extension of the forward guidance. Unlike other occasions in the past, Draghi went for unanimity this time, rather than leaving anyone behind. This limited the scope for more ambitious action.
Of course, this may be a consequence of the relative closeness of the end of the president’s mandate. As of the beginning of November, someone else will be taking questions at the traditional ECB press conference. A majority decision on measures which tie the ECB’s hands well into the future would have been less credible. Draghi’s successor is likely to be sitting in the Governing Council. What if he did not agree with what was decided today?
As the day of Draghi’s departure draws closer, compromises may become the new norm at the ECB. The war of attrition around Draghi’s succession has replaced shock-and-awe.