TLTRO (Targeted Longer-Term Refinancing Operations )

published 13 May 2019

Updated September 2019

Targeted Longer-Term Refinancing Operations (TLTRO) is one of the "unconventional" monetary policy tools used by the European Central Bank (ECB). The ECB agrees to lend money to commercial banks over a set period at a very low rate, on condition that they lend this money out into the "real" economy (by making loans to businesses, for example). The point is to give banks a cheap source of funding that they are encouraged to lend out, in order both to raise bank profit margins and to boost economic activity and growth.

The first tranche of TLTRO loans was launched in June 2014, with a second batch following in March 2016. The third tranche was launched in June this year, and began in September. Initially the plan was that banks would be allowed to take out a two-year loan, at a rate based on the ECB's average rate plus 0.1% (with the loan getting cheaper, the more the bank lends out).

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However, the rate on the loans was lowered this month as the ECB's views on future growth deteriorated (thus justifying a move to even looser monetary policy). Meanwhile, the loan period was lengthened to three years, with a repayment option at two years. In other words, the banks will be able to access funds at a lower rate, and for a longer period of time, than before, which should boost the profitability of any loans the banks make.

Indeed, as strategist Tom Kinmouth of ABN Amro put it, the move resulted in banks benefiting from terms that were "considerably better" than previously planned "they can now borrow from the ECB... as low as 0.5%". In other words, "the ECB will pay banks to take money."

Of course, making money available to banks to lend is a very different matter to finding businesses and individuals who are keen to borrow the money. Some argue that cheap funds haven't driven growth higher because central banks are now "pushing on a string."