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The ECB’s market presence will last for a long time

In the midst of a very unusual week for the eurozone (the prime ministers of the number-two and -three economies resigned), the ECB once again managed to surprise the markets:

  • QE extended by at least 9 months at a slower pace. While the markets expected the QE to be extended until September 2017 at a rate of €80 bn (€480 bn in additional purchases), the ECB extended this programme from March to December 2017 at a pace of €60 bn (€540 bn in additional purchases). We have no details on the QE's distribution by programme (PSPP, CSPP, CBPP3, ABSPP).
  • Increase in the size and/or length of the QE, if the outlook worsens or financial conditions threaten the return of inflation.
  • Change in the maturity constraint. While purchases made under the PSPP were on maturities of 2-31 years, they may now be between 1-31 years.
  • Removal of the yield constraint. Now the Eurosystem may buy securities with a yield lower than the deposit rate. This opens the door to possible PSPP-related losses for the Bundesbank.

This is not tapering! On the contrary, Mario Draghi's message points to an even more sustained market presence for the ECB. He said that achieving 1.7% inflation in 2019 (the ECB's forecast to that horizon) was "not really" the same as achieving a target.

The door is closed in terms of the change in capital rule. Changing the maturity constraint, and removing the yield constraint, increases the inventory of PSPP-eligible German securities by quite a lot. This shows that the decision has been made to continue the QE without dropping the capital key rule. We can imagine that purchases of German securities will be redirected toward the short portion of the curve.

These adjustments are a solution to the problem of German bond rarity. The Eurosystem currently holds €290 bn in German debt. Assuming that programmes will be uniformly reduced in size, the Eurosystem should purchase nearly €170 bn in German debt in 2017 (with net issuance close to zero). Yet PSPP-eligible German debt, respecting the issue share limit, is now close to €465 bn.

These new measures are positive in the medium term for the financial sector because they lessen the pressure on the long portion of the German yield curve. The low-rate environment had heavily weighed down financial security performance: the Euro Stoxx banks lost more than 25% over the first nine months of the year. So, 45% of the euro fixed-income market offered negative yield. With the recent rise in yields since September, the financial sector has outperformed on the equity and credit markets. There is no possible parallel with 2008: banks' solvency, liquidity, and financing structure have increased significantly to meet with new regulatory constraints.

Against this backdrop, its seems legitimate to once again emphasize that ultra-accommodative monetary policies are close to reaching their limits. Mario Draghi drove home the message more than usual about the importance of fiscal policy and structural reforms to support economic growth.The ECB is desperately seeking a partner to which it can pass the ball.

 

 

 

 

2016-12-09-key-focus
AINOUZ Valentine , Strategy and Economic Research at Amundi
DRUT Bastien , Strategy and Economic Research at Amundi
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The ECB’s market presence will last for a long time
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