Global Daily – Weak lending strengthens TLTRO case

by: Aline Schuiling , Nick Kounis

Euro Macro: Bank lending to the corporate sector weakens further –  The ECB published its report on monetary developments in the eurozone today, which also includes data on bank lending. The report revealed that bank lending to non-financial companies weakened further in January. The monthly flow in loans (adjusted for sales and securitisation) to companies declined from EUR 9.4bn in December to -0.8bn in January. This was the first negative monthly reading since June 2017. The annual growth rate has been gradually declining since the middle of 2018 (when it stood above 4%) and fell further, from 3.9% in December 2018 to 3.3% in January 2019. If the monthly flow were to stabilise at its average level of the past three months, the annual growth rate would drop to around 2.5% after the summer. The slowdown in loan growth largely reflects the weaker economic activity since the start of 2018, as bank lending tends to react to economic developments with a lag of around 1-1.5 years. As the economy is expected to remain on its sub-trend growth level in 2019H1, bank lending should slow further in the coming quarters. On top of that, ECB’s chief economist Peter Praet has recently mentioned that he saw the risk that banks could act more pro-cyclically now than in the past (meaning that the lending behaviour of banks tends to amplify the economic business cycle more than in the past). This view of Mr Praet seems to be confirmed by the most recent Bank Lending Survey, in which banks reported that they expected to tighten lending standards on loans to companies in Q1 after they had eased them in each quarter during the past two years. We therefore expect the trend in loan growth to deteriorate going forward. Overall, we think that the early data on bank lending and the outlook supports the view that the ECB will soon announce a new TLTRO. (Aline Schuiling)

ECB View: Weidmann validates market rate expectations – Bundesbank President Jens Weidmann made relatively dovish remarks on Bloomberg TV today, at least considering that he is perhaps the most hawkish official on the Governing Council. He signalled that the assessment of financial markets that interest rate hikes would be delayed is justified. He asserted that ‘forward guidance is working as it should because markets have already reacted to the softening in economic data by postponing their expectation of a lift-off…the market reaction is rather plausible to me’. Financial markets are currently pricing in the first 10bp hike in the deposit rate in June 2020 and two steps in total next year. This is clearly later than the ECB’s current guidance that policy rates will remain on hold through the summer of this year. Speaking separately at the Bundesbank press conference, he maintained that despite this there was no acute need to adjust the forward guidance on policy rates, suggesting that he may not support such a move at next week’s Governing Council meeting. He recognised the weakness in the data saying the economy was experiencing ‘a dent that is extending into the current year’ with growth positive but ‘well below potential’.  Despite this assessment, he implied that inflation would still turn up over the medium term and that the outlook was still for monetary policy normalisation. We think interest rates will ultimately be on hold until December 2020. (Nick Kounis)