ECB: The beginning of the end of QE? - Commerzbank

The ECB is extending its bond purchases by nine months, but reducing the monthly purchase volume from €80bn to €60 bn. Most economists, were expecting the ECB to extend its bond purchases by six months to September 2017 and to stick to the monthly purchase volume of €80bn, according to Dr Jörg Krämer, analyst at Scotiabank. Instead, it has opted to prolong these purchases by nine months but to lower the volume to €60bn. Investors are now asking whether this marks the beginning of the process of exiting from bond purchases.

Key Quotes

“The ECB knows that from the beginning of 2018 it will have bought up one-third of German and Italian government bonds. It would then have reached its self-imposed upper limit, which for legal reasons it cannot simply raise, as Draghi stressed today. So at some point it will be forced to taper purchases. It thus makes sense to try out a moderate reduction in the monthly purchase volume. The timing is good in that, with the attempted Italian Senate reforms failing at the weekend , Italian government bonds have proved highly resilient. To ensure that they remain so, Draghi took steps at today's press conference to reassure investors. First, he announced that if need be the volume of purchases would be increased again. Second, the bank extended the pool of eligible bonds by stating that in future it could formally also buy bonds with a residual maturity of only one year. This increases the volume of bonds eligible for purchase and mathematically reduces the percentage of bonds it holds. We now estimate that the ECB would reach the 33% upper limit six months later. And finally, the bank has created the option of also buying bonds when their yield is below the deposit rate.”

“The ECB did everything it could today to reassure the market after reducing its purchase volume. In 2018, however, it will be forced to scale down purchases gradually if it is not to exceed the legal limit. Yet this does not mean an end to the bank's very generous monetary approach. The causes of the government debt crisis are after all more acute than ever, and there is a threat of it reemerging. Consequently, the euro zone will not settle down. Growth remains unstable, and contrary to what the ECB is hoping, core inflation is unlikely to see a sustained increase. As a result, the bank can be expected to adopt aggressive counter-measures once it is forced to end its bond purchases, probably in 2018. It could, for example, offer commercial banks a long-term tender with a maturity of around five years. This would enable banks in the southern euro zone countries to buy up their own bonds with cheap ECB money, taking over from the ECB as buyers. So sadly, today does not mark the beginning of the end of a monetary policy which is far too lax.”