Blog Post

The ECB has fired its bazooka

The ECB announced today an expansion of its asset purchases, to include securities issued by European agencies and institutions, as well as central government in the euro area.

By: and Date: January 23, 2015 Topic: Macroeconomic policy

The ECB announced today an expansion of its asset purchases, to include securities issued by European agencies and institutions, as well as central government in the euro area. Purchases are intended to be continued until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term. This is a positive feature of the announcement, as it leaves the operation open ended enough. 

The combined target monthly asset purchases will amount to 60 billion euro. However, this will also include the purchases already envisioned under the ABSPP and CBPP. There are no weekly targets for purchases under these two programmes, but the ECB had bought about 35bn combined as of 16 January. The CB purchases began in October and ABS purchases in November 2014, meaning the ECB bought on average around 10 billion a month. Assuming a similar pace in the future, the additional purchases would be around 50 billion (and not 60) per month, leading to a total of 900/950 billion under the scenario in which the programme were to be stopped in September 2016. This is still positively above the 500-700 billion range that had been rumoured ahead of the meeting.The maturity spectrum will also be very large, as eligible securities will range form a minimum remaining maturity of 2 years to a maximum remaining maturity of 30 years at the time of purchase.

The purchases will be pari passu with private investors, which will be achieved by imposing a 33% issuer limit and a 25% issue limit (the latter needed to help avoid that the ECB achieves a blocking stake under Collective Action Clauses (CACs)).

The most interesting point is the risk sharing arrangement of the ECB programme

The most interesting point, as largely expected, is the risk sharing arrangement of the programme. Purchases of securities of European institutions (which will account for 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. This is consistent with the idea that these securities are at present the closest resemblant to an Euro/EU-wide bond, as we first pointed out in May. On top of this, the ECB will hold 8% of the additional asset purchases, meaning that a total 20% of the purchases will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will however not be subject to loss sharing at all. This effectively means that 80% of the risk is borne by the NCBs, and fragmented along national borders. However, if we consider only the purchases of non-EU-wide securities (i.e. if we exclude that 12% of the purchases that are likely to be safest), then only 9% of the national sovereign risk will be shared.

  • Overall, the large majority of the governing council came to the correct assessment that inflation expectations are getting disanchored and that therefore monetary policy action was needed. 
  • The programme is large. This increases its effectiveness and will have a powerful impact especially through the exchange rate channel and the portfolio rebalancing channel
  • Some Northern governing council members were concerned that such a large programme would mean that the ECB takes on board a too significant fiscal risk. The ECB therefore reduced risk sharing substantially. This may reduce the effectiveness of the programme.
  • Before this decision, nobody could have questioned whether monetary policy is "single". Now, investors can rightly ask that question. Mario Draghi addressed this several times in his comments but his answers were not convincing. This question will be an important issue in the coming months and potentially years.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: Macroeconomic policy Date: September 23, 2021
Read article More on this topic More by this author
 

Blog Post

Germany’s foreign economic policy: four essential steps

Germany and the EU need to develop a strong and proactive agenda to manage foreign economic relations, which are essential for German and European prosperity.

By: Guntram B. Wolff Topic: Macroeconomic policy Date: September 23, 2021
Read article Download PDF More by this author
 

Policy Contribution

A new integrated-value assessment method for corporate investment

To contribute more to the green transition, companies should start to make investment decisions based on integrated-value assessment, weighing up the environmental and social impacts alongside the financial returns.

By: Dirk Schoenmaker Topic: Green economy, Macroeconomic policy Date: September 23, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Unboxing the State of the Union 2021

In this Sound of Economics Live episode, Bruegel experts look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

By: The Sound of Economics Topic: Macroeconomic policy Date: September 15, 2021
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Unboxing the State of the Union 2021

In this Sound of Economics Live episode, we look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

Speakers: Grégory Claeys, Maria Demertzis, Alicia García-Herrero and Giuseppe Porcaro Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 15, 2021
Load more posts