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9.07.2021  

ECB QE Monitor - July 2021

Published July 9, 2021

5 to 10 minutes

5 to 10 minutes

Key points for this month


  • The ECB's balance sheet is now equivalent to 65% of euro area GDP compared to 39% at the start of 2020.
     
  • ECB PEPP & APP: pace of purchases is stable
    • In June, total net purchase pace was around €101bn, the same as in May, which is in line with our forecasts of €90-100bn/month.
    • PEPP: pace of monthly purchases remains stable at €80bn in June, identical to the purchases in May, bringing the total purchases under PEPP to €1185bn out €1850bn envelope that could be used until end of March 2022.
    • APP: the pace of purchases is also stable with € 20.6bn in June vs. € 20.1bn in may, in line with the target pace of €20bn/month. The Monthly APP data shows a 65% allocation to the PSPP, which is below the 2020 average of 75%.
       
  • APP / PSPP:
    • Jurisdiction : deviation of PSPP purchases from capital key proportions was in favour of Germany, France, Spain, Netherlands and Finland against in Italy and Supras in June, likely due to redemption smoothening.
    • Average maturity : the average maturity of PSPP was 7.3 years in June. The average maturity of Supras increased since October 2020 from 7.3 to 7.9 years while the average maturity of Spain continues to decrease, falling below the 8-year threshold.
       
  • Corporate net purchases:
    • At the same time, although the PEPP remains oriented towards the public sector, CSPP’s share remains stable with 27% in June.
    • The total ECB’s corporate-bond purchases point to an acceleration of net purchases in 2Q, and this is likely to continue in 3Q. This is in line with our forecast of up to EUR 8bn of net corporate-bond purchases per month throughout the year.
       
  • APP / Redemptions:
    • APP redemptions in June 2021 totalled €22.1bn, of which €19.5bn will be PSPP redemptions. Between July 2021 and June 2022, total APP redemptions will be €265bn, of which €201bn will be PSPP redemptions
       
  • No granular details for PEPP were available at this release as the ECB will only publish details of PEPP composition on a bimonthly basis and the next one will be in early August.

Our convictions


We expect the ECB to continue supporting the euro area economy through an asset purchase program after March 2022. In the absence of a significant rise in growth, the ECB stands alone in trying to avoid financial fragmentation. EU recovery fund can only be effective if sovereign yields remain low and stable.

ECB's strategy review: Main takes


The recent release of the strategic review confirms our convictions, as the following main takes show:

  • The outcome was close to expectations with the main lines represented by the symmetry in inflation target, the inclusion of housing and the focus on the fight against climate change. In a nutshell, 1) the ECB would target inflation at 2% (instead of close to but below 2%) and would tolerate short term overshoot relative to the target; 2) housing would be included in the inflation index calculations, 3) it will incorporate climate change considerations into its monetary policy framework and into its monetary policy operations.
     
  • Symmetry means undershoots are as undesired as overshoots and that the ECB framework is different from the Fed’s average inflation targeting, as symmetry allows for “transitory” and “modest” overshooting when policy was earlier constrained by the lower bound. Main takes on the inclusion of housing in the calculations are that it should not produce meaningful changes and it is going to take quite a period of time before becoming effective.
     
  • Main conclusion is that the commitment to flexibility and pragmatism regarding non-conventional tools confirmed by the review, together with the symmetric inflation target are consistent with our expectations for QE to stay in 2022 and with the expected easy path of monetary policy. President Lagarde hint that getting to 2% implies further a bias towards "forceful" (or more persistent) action in the short-term reinforces the perception that stimulus is still needed, given current low ECB mid-term inflation projections and in light of the symmetric target.

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