ECB Preview – Policy Recalibration to Focus on PEPP and TLTRO

Central banks news

Given the strong hint in the October meeting, the ECB is prone to add monetary easing measures at Thursday’s meeting. We expect to see increase in the size of PEPP and adjustment of TLTRO. As the policy rates have been staying in the negative territory for years, it is unlikely to see further rate cut at the meeting. Concerning the updated economic projections to be released, we expect slight downgrade in the inflation outlook given the recent developments.

As noted in the October meeting minutes, the ECB indicated that it would in December “recalibrate all of its instruments, as appropriate, to ensure that financing conditions remained favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path, thereby fostering the convergence of inflation towards its aim in a sustained manner, in line with its commitment to symmetry”.


Of the various tools that ECB manages, the pandemic emergency purchase program (PEPP) and the targeted longer-term refinancing operations (TLTROs) are the keys. For the former, we expect to see an increase of 500B euro to the current envelope, making the total size to 1850B euro. The program will extend to last at least until end-2021. We do not expect the central bank to announce the size of monthly purchase, though.


The TLTRO-III operation lasts for 3 years. With 7 tranches in total, the 6th is allocated in December 2020 and the last one in March 2021. We expect ECP to provide 4 additional TLTRO operations until 1Q22. Currently, banks seeking this facility can enjoy the funding rate of -1% (50 bps below the deposit rate) for one year, subject to certain lending conditions. We expect the discount window could be extended to the entire 3-year duration. Further easing in the collateral requirement is also likely.

Two-Tiered System

Acknowledging the detrimental effects of negative interest rates on banking profitability, ECB introduced a 2-tier system in September 2019. The system exempts credit institutions from remunerating, at the negative rate currently applicable on the deposit facility, part of their excess reserve holdings. The volume of reserve holdings in excess of minimum reserve requirements that is exempt from the deposit facility rate is determined as a multiple of a credit institution’s minimum reserve requirements. The current multiplier is 6x reserve requirement. We expect ECB to announce an increase to 10x in December. Such as increase would exempt a greater part of the banks’ liquidity from the negative deposit rate.

Inflation Forecast Downgrade

The December meeting would also bring the latest economic projections. Flash reading of headline CPI steadied at -0.3% y/y in November, a level unchanged since September. The came in weaker than consensus of -0.2%. Core CPI also stayed at +0.2%. The overall trend of inflation remained subdued. We expect slight downgrade in the inflation outlook throughout the forecast horizon.