Increase in ECB QE underwhelming so far - Capital Economics
European Economics

Increase in ECB QE underwhelming so far

European Economics Update
Written by Jack Allen-Reynolds

The account of March’s ECB meeting showed that the decision to increase asset purchases was agreed by all members, but that some were reluctant to do much more. In practice, purchases haven’t risen very far since then. Given that the Bank could have ramped them up much further, it seems that policymakers are broadly content with the current level of yields.

  • The account of March’s ECB meeting showed that the decision to increase asset purchases was agreed by all members, but that some were reluctant to do much more. In practice, purchases haven’t risen very far since then. Given that the Bank could have ramped them up much further, it seems that policymakers are broadly content with the current level of yields.
  • As a quick reminder, at the ECB Governing Council’s meeting in March, it agreed that over the next quarter, net purchases under the Pandemic Emergency Purchase Programme (PEPP) would be “conducted at a significantly higher pace than during the first months of this year”. This was in line with what we suggested they would do (see here), but it took markets by surprise and bond yields fell on the day.
  • The account of the meeting hints at some difficulties in agreeing to a “significant” increase in the pace of purchases. At least one member of the Council argued that a “more moderate” increase in the pace of bond buying would be appropriate, while there are several mentions of members wanting to avoid the perception that the ECB was targeting yields or carrying out yield curve control.
  • The account also remarks that while all members “joined a broad consensus” around the proposal of a significant increase, that was only on the understanding that the total PEPP envelope was not being called into question and that purchases could be reduced in future. It seems that the hawks on the Council can only ever be persuaded to do more if at the same time the Bank suggests that it might do less at a later date.
  • As it turns out, the hawks might be quite pleased with how small the increase in purchases has been. (See Chart 1.) In the four weeks since the meeting, net purchases under the PEPP amounted to just under €65bn. In the four weeks before that, they totalled around €58bn. Admittedly, Easter is partly to blame as there were fewer working days last week on which to make purchases. But if policymakers had wanted to send a clear message about their desire to drive yields down, they could have done much more. Bond yields are now around the same level as before the ECB announced that it would step up its bond buying.
  • It is also worth noting that over the past eight months, the breakdown of the ECB’s purchases under the PEPP across countries has been very closely aligned with its capital key. That contrasts with the first few months of the programme. (See Chart 2.) In other words, the Bank is no longer using the flexibility available within the PEPP to skew its purchases towards the periphery in an attempt to drive spreads lower.
  • With all of that in mind, we suspect that the Bank will let Bund yields rise as the recovery takes hold in the second half of the year. We forecast the 10-year Bund yield to end 2021 at around -0.25%. The ECB seems unlikely to actively lower spreads, but it’s possible that an improvement in investor sentiment as the global economy recovers over the rest of the year pushes peripheral spreads down a touch further.

Chart 1: Weekly Net PEPP Purchases (€bn)

Chart 2: Difference between Actual Country Share of PEPP Purchases and Share Implied by Capital Key (ppts)

Source: Refinitiv

Sources: ECB, Capital Economics


Jack Allen-Reynolds, Senior Europe Economist, jack.allen-reynolds@capitaleconomics.com