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Cheap ECB loans will return this year, says Crédit Agricole

The ECB made its last TLTRO offering in December

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The European Central Bank will reverse its plans to wean banks off cheap loans, according to Crédit Agricole SA.

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

First introduced a decade ago to help banks ride out the region’s debt crisis, these operations have been instrumental in keeping financial conditions loose. In a bid to unwind its ultra-easy policy in the face of record inflation, the ECB launched its latest TLTRO offering in December.

But Harreau expects the bank will have to start pumping out cheap cash again to support financial institutions struggling with the prospect of higher borrowing costs. Money markets are betting that the ECB will raise the deposit rate to 0% by the end of next year, from minus 0.5% currently.

“In the post-eurozone sovereign debt crisis, we doubt that the ECB will be able to end its TLTRO”, The injections total 2.2 trillion euros, or about half of the total excess liquidity floating in the banking system.

The latest iteration of the TLTRO offered a softer rate if certain lending criteria were met, which ends in June, raising fears of a sharp decline in excess liquidity if banks decide to return cash later. This helped push the premium on 12-month financing to the highest level in nearly two years from current rates last month.

The ECB could announce details of an extension to its cheap loan 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 following the decision to the ECB on rates in December.

Harreau said cheap loans should become a permanent policy tool. “A regular and predetermined implementation of operations would reduce uncertainty and ensure that banks are able to lend to the private economy under the best possible conditions,” he added.

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