On December 8, the ECB once again managed to surprise the markets.
The main announced measures are the following:
- 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 pace 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 becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path 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.
Extending the QE raised the issue of the lack of German PSPP eligible bonds. From then on, two options were possible: deviating dramatically from the capital key rule or modifying the QE parameters in order to enlarge the stock of German PPSP eligible assets. The fact that the governing council decided to modify the maturity constraint and to drop the yield constraint shows that they clearly chose the second option. This shows that the abandon of the capital key rule is put aside for a while. At the end of November 2016, the Eurosystem held €290 bn in German PSPP securities. Assuming that programmes (PSPP, CSPP, ABSPP, CBPP3) 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 (central government, regions, agencies), respecting the issue share limit, is now close to €465 bn, including approximately 80 bn for the 1 year – 2 years segment. It is particularly worth noting that purchases on this segment were very rarely the case since the start of the QE in March 2015.One can make the assumption that PSPP of German securities will be skewed on the short-end of the curve.