(1)

Pursuant to Article 1(4) of Guideline (EU) 2015/510 (ECB/2014/60), the Governing Council may, at any time, change the tools, instruments, requirements, criteria and procedures for the implementation of Eurosystem monetary policy operations.

(2)

On 22 July 2019, in pursuing its objective to maintain price stability by preserving favourable bank lending conditions and thereby supporting the accommodative stance of monetary policy in Member States whose currency is the euro, the Governing Council adopted Decision (EU) 2019/1311 of the European Central Bank (ECB/2019/21) (2). This Decision provides for a third series of targeted longer-term refinancing operations (TLTROs-III) to be conducted over the period September 2019 to March 2021.

(3)

Since the adoption of Decision (EU) 2019/1311 (ECB/2019/21), the parameters and conditions of the TLTROs-III have been recalibrated on several occasions, as considered necessary and appropriate in light of the risks to price stability, the monetary policy transmission mechanism and the economic outlook in the euro area existing at the time. These adjustments took place in a disinflationary environment, requiring a highly accommodative monetary policy stance to ensure price stability over the medium term. In particular, on 12 September 2019, in order to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy in Member States whose currency is the euro and to support the accommodative stance of monetary policy, the Governing Council decided to change certain parameters of TLTROs-III, including to increase the maturity of all operations from two to three years and provide for a reduction in applicable interest rates. On 12 March 2020, in order to support bank lending to those most affected by the spread of the coronavirus disease (COVID-19), in particular small and medium-sized enterprises, the Governing Council decided to change certain parameters of TLTROs-III, including to increase the borrowing allowance. Moreover, on 30 April 2020, in order to further support the provision of credit to households and firms in the face of the prevalent economic disruptions and heightened uncertainty, the Governing Council decided to provide for an additional temporary reduction in interest rates applied to all TLTROs-III under certain conditions (3). On 10 December 2020, the Governing Council decided to further recalibrate the conditions of TLTROs-III aiming to contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability. In particular, it decided to extend the period over which considerably more favourable terms apply to June 2022, conduct three additional operations between June and December 2021, and raise the total amount that participants are entitled to borrow in TLTROs-III. At that time, the Governing Council indicated that it continued to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry (4).

(4)

TLTROs-III, as adjusted when warranted, have therefore played a key role in maintaining price stability, in particular throughout the acute phase of the pandemic period, by preserving favourable financing conditions in a disinflationary environment and supporting the accommodative stance of monetary policy necessary to address severe downside risks to the economy and to price stability. During that period, the European Central Bank (ECB) granted exceptionally favourable financing conditions to participating credit institutions through TLTROs-III, with a view to sustaining lending to the real economy at a time of intense stress.

(5)

The rapid and unexpected rise in inflation to levels that are unprecedented since the introduction of the euro, mainly due to unexpectedly high energy costs and supply deficiencies and the substantial upward revision in the outlook for medium-term inflation since the end of 2021, calls for a fundamental reassessment of the appropriate monetary policy stance. Energy and commodity prices have sharply increased after the Russian invasion of Ukraine and the ensuing trade disruptions have exacerbated supply bottlenecks, heightened uncertainty and intensified inflation pressures across sectors. This drastic change in circumstances could not have been foreseen either when TLTROs-III were established or when their conditions were recalibrated and was due, to an important extent, to external shocks. This unexpected and unprecedented change in circumstances, exacerbated by the economic fallout of the Russian invasion of Ukraine, requires adjustments in the monetary policy stance and a recalibration of all monetary policy instruments, including TLTROs-III. In particular, the Governing Council has embarked on an accelerated and frontloaded path of monetary policy normalisation in order to ensure that inflation stabilises at the 2 % target over the medium term in line with the ECB’s price stability mandate. Since December 2021, the Governing Council has decided to discontinue net asset purchases under the Asset Purchase Programme and the Pandemic Emergency Purchase Programme and, subsequently, to increase the key ECB policy rates by an aggregate 200 basis points to date.

(6)

While the increase in key policy rates has so far been smoothly transmitted to households and firms in the euro area, the current circumstances require further accelerating the transmission of rate policy to financing conditions more broadly. The existing pricing terms of TLTROs-III imply that before and after the two special interest rate periods ranging from 24 June 2020 until 23 June 2022, the applicable interest rate is linked to the deposit facility rate or the rate on the main refinancing operations over the entire life of the respective operation. This is slowing down the normalisation of bank lending conditions and is hindering the ability of the ECB to deliver on its price stability mandate. In fact, as policy rates are raised, the rate of TLTROs-III adjusts only very gradually. The current TLTROs-III conditions therefore offer very few incentives to participating credit institutions to repay their outstanding TLTROs-III amounts early. The current TLTROs-III conditions also contribute to maintaining a larger Eurosystem balance sheet which in turn works against the intended monetary policy normalisation. This is because the size of a central bank’s balance sheet is a key signal of the degree of accommodation that monetary policy provides to the economy and directly influences the cost of liquidity in the market. An adjustment in the terms and conditions of TLTROs-III removing the deterrent for participants’ early repayment of their outstanding TLTROs-III amounts would therefore also favour reducing the Eurosystem balance sheet, bringing it more in line with the current monetary policy stance. Hence, the adjustment in the terms and conditions of TLTROs-III pursues the objective of maintaining price stability by accelerating the normalisation of financing conditions and reducing the Eurosystem balance sheet.

(7)

On 27 October 2022, the Governing Council decided to adopt additional monetary policy measures aiming to ensure the timely return of inflation to the ECB’s 2 % medium-term target. The Governing Council considers the full range of measures adopted on 27 October 2022 necessary and proportionate to implement the monetary policy stance appropriate to restore price stability over the medium term. As part of this package, the Governing Council decided that the interest rate to be applied to each respective outstanding TLTRO-III should be calculated as follows: starting from 23 November 2022 and until the maturity date or early repayment date of each respective outstanding TLTRO-III, the interest rate should be indexed to the average applicable key ECB interest rates over this period, as opposed to the life of each respective TLTRO-III, in order to contribute to the overall monetary policy normalisation process.

(8)

It is considered that linking the TLTROs-III interest rate to the average deposit facility rate or the average rate on the main refinancing operations for the remaining maturity of the respective TLTRO-III is suitable to induce an acceleration in the normalisation of financing conditions and reduce the Eurosystem balance sheet, to achieve the objective of maintaining price stability. This measure is expected to increase banks’ funding costs, therefore contributing to timely restoring price stability in the current inflationary environment. In addition, the increase in bank funding costs resulting from the recalibration of TLTROs-III conditions is expected to have a non-negligible effect on lending rates. The impact of the changes in the TLTROs-III conditions on bank lending rates is ultimately expected to have a significant downward impact on inflation over the medium term. Further, the changes in TLTROs-III conditions are also expected to remove deterrents for early repayment of outstanding TLTROs-III borrowing by participating lending institutions, thereby reducing the Eurosystem balance sheet and contributing to the overall monetary policy normalisation.

(9)

Linking the TLTROs-III interest rate to the average deposit facility rate or the average rate on the main refinancing operations for the remaining maturity of the respective TLTRO-III operation does not go beyond what is necessary. There are no less intrusive and at the same time equally efficient monetary policy measures to achieve the objective of both inducing a normalisation of financing conditions and reduce the Eurosystem balance sheet. Further, the desired progress towards tighter monetary and financing conditions that an adjusted pricing of TLTRO-III would engineer could not be achieved more efficiently by means of rate hikes.

(10)

Any potential adverse impact that the proposed changes may have on participating credit institutions is mitigated by preserving the currently applicable favourable pricing until 22 November 2022, by the introduction of additional early repayment dates on which these institutions could repay their outstanding TLTROs-III amounts, by providing them with sufficient time to reconsider their funding mix before the changes enter into force and by continuing to offer an interest rate on TLTRO-IIIs which, even after the change, is favourable compared to market-based funding options. The existing interest rate calculation should therefore be maintained for the period from the settlement date of each respective TLTRO-III until 22 November 2022. Furthermore, three additional voluntary early repayment dates should be introduced in order to provide TLTRO-III participants with additional opportunities to terminate or reduce the amount of a respective TLTRO-III before maturity.

(11)

Given the importance of the objective of maintaining price stability, changing the TLTROs-III pricing as soon as possible and without transitional measures is essential to achieve the intended objectives of inducing an accelerated normalisation of financing conditions and reduce the Eurosystem balance sheet. The adoption of transitional measures would render the changes less efficient to induce banks to normalise lending conditions and would maintain strong deterrents to early voluntary repayments, as well as risk blurring the policy signal conveyed by the measure. This Decision should therefore enter into force as a matter of urgency.

(12)

Therefore, Decision (EU) 2019/1311 (ECB/2019/21) should be amended accordingly,