The ECB started its QE on March 9. For the time being, it has completed 43.8% of the expanded Asset Purchase Programme (APP) and purchased € 393.6 bn under the Public Sector Purchase Programme (PSPP).
Key points for this month:
- The pace Eurosystem’s purchases in October (considering the pace of weekly purchases) has been in line with the average levels seen since early-March.
- In October, the Eurosystem bought sovereign bonds on longer maturities for Germany (7 years) and approximately on the same maturities for the other countries.
- In effective terms, the euro depreciated in October, notably after the governing council.
- Core countries’ yields declined in October, on short and long maturities and are reaching levels not observed since May. Peripheral spreads remained roughly stable in October.
- Long-term inflation expectations (inflation swap forward 5y. in 5y. and 10y. inflation break-even rates) rebounded in October but remain relatively low.
- Credit spreads tightened sharply in October.
- Eurozone Equity indices rebounded but remain below pre-summer levels.
- Volatility and financial stress declined in October after the rise of this summer.
- No substantial expansion of loans to non-financial corporations while there is some improvement for loans to households (last figures: September). Interest rates on new loans to SMEs rose marginally in Italy and Spain (last figures: September).
- Spanish banks continued to sell sovereign bonds while the exposure to Eurozone govies of German, French and Italian banks increased slightly in September.
- Business climate and consumer confidence indicators continued to improve.
On credibility, the announcement of QE was a resounding success. Its scale, comprehensiveness and suitability did not disappoint. The financial markets responded positively, as reflected in the fall in short and long rates and the advance of asset classes such as Eurozone equities.
Implementation seems like a simple matter, at least in principle. The ECB will nonetheless be faced with the challenge of purchasing €60 billion in securities each month in illiquid markets that are short of willing sellers. QE encourages market players to buy or hold on to assets rather than selling them. Meanwhile, the banks, which are major holders of government debt, retain these assets in portfolios for regulatory purposes or simply out of liquidity considerations, as the securities can be used as collateral. Given this backdrop, unless there is an explosion in issuance by governments, a rapid change in regulators’ policy or “forced” sales by public funds (is this not what Japan demanded of public pension funds?), the ECB’s drive to establish this programme will inevitably run into the realities of the market, which will undoubtedly push down short and long-term interest rates even further.
Ultimately, if everything proceeds as anticipated, the Eurozone can look forward to a more growth-friendly environment. The final step for Mario Draghi involves the matter of effectiveness.
We have already alluded to the importance of transmitting QE to the real economy. Several transmission channels will have to be activated in order for growth to be revived:
- An “exchange rate effect”: any currency depreciation would contribute to competitiveness and/or help restore business margins and/or lead to natural profit growth;
- An “interest rate effect”: any additional drop in interest rates would improve the creditworthiness of indebted entities and offer (potential) support to bank lending;
- A “banking credit effect”;
- A “spread effect”: the same impact as lower interest rates;
- A “wealth effect”: growth in the equity and real estate markets would elevate the wealth of market players, both consumers and investors;
- An “inflation anticipation effect”: the ECB’s intention is to stop the deflationary spiral, as lower prices mean lower consumption;
- A “confidence effect”: without confidence, it will be difficult for growth to take off.
This would naturally also require a consistently low level of “financial stress”. The outlook for the peripheral countries is not completely certain in view of negotiations, solvency challenges and elections. QE must not be overshadowed by varying political situations.
NB: three important dates to have in mind
- June 5, 2014: Mario Draghi announces the ECB wants to expand its balance sheet to the 2012 level. Negative deposit rates and the launch of a TLTRO programme are also announced.
- January 22, 2015: the ECB decides to launch an expanded asset purchase programme (a sovereign QE).
- March 9, 2015: the sovereign QE programme turns effective. The ECB starts buying sovereign bonds.