The ECB started its QE on March 9 (decision to purchase €60 bn of assets per month until Sept. 2016) and decided on December 3 to extend it until March 2017. For the time being, the Eurosystem has already purchased € 729 bn of assets, including € 608 bn under the Public Sector Purchase Programme (PSPP), and still has to buy € 771 bn of assets until March 2017.
Key points for this month:
- The pace Eurosystem’s purchases slowed slightly in the first part of February (considering the pace of weekly purchases) before accelerating over the last week.
- In February, the Eurosystem bought sovereign bonds on slightly higher maturities for France and supranationals.
- In effective terms, the euro remained roughly stable in February (appreciation in the first part of the month, then depreciation) but remains close to December 2014 levels.
- Core countries’ yields continued to fall in February. Sovereign spreads tightened slightly in Italy and in Spain.
- Long-term inflation expectations hit a new historical low before rising slightly.
- Credit spreads tightened sharply in February after the sharp widening of the previous weeks.
- Eurozone Equity indices rebounded and are rather close to the early 2016 levels.
- Financial stress and market volatility fell heavily after their strong rise of the previous weeks.
- Slight acceleration of loans to household. Interest rates on new loans to SMEs are stabilizing.
Four 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 program (sovereign QE).
- March 9, 2015: the expanded APP turns effective. The ECB starts buying sovereign bonds.
- December 3, 2015: the ECB announces that the QE is extended until March 2017 and that the PSPP is extended to local and regional governments’ debt securities. Maturing assets held by the Eurosystem will be reinvested “as long as necessary”. The deposit rate is cut to -0.30%.
Implementation seems like a simple matter, at least in principle. The ECB will nonetheless be faced with the challenge of purchasing €60 bn 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 program will inevitably run into the realities of the market, which will undoubtedly push down short and long-term interest rates even further.
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.