ECB to ex­tend time­frame, loosen re­stric­tions on bond pur­chases

The Pak Banker - - FRONT PAGE -

The Euro­pean Cen­tral Bank, faced with a fur­ther slow­down in euro zone growth af­ter Bri­tain's vote to leave the Euro­pean Union, will soon be forced to ex­tend and ex­pand the scope of its as­set pur­chase pro­gram, a poll of econ­o­mists showed. Apart from pur­chas­ing 80 bil­lion eu­ros a month of bonds be­yond March 2017, econ­o­mists said the ECB is likely to aban­don an ear­lier self-im­posed re­stric­tion and be­gin buy­ing bonds with neg­a­tive yields be­low the ECB's -0.40 per­cent de­posit rate.

It could also raise the limit on how much it can buy of each bond is­sue that is not pro­tected by col­lec­tive ac­tion clauses, ac­cord­ing to the poll, which fore­sees no fur­ther in­ter­est rate cuts or in­creases to monthly as­set pur­chases.

The ECB is not ex­pected to make any changes to pol­icy at its meet­ing on Thurs­day. The find­ings of the first poll since Bri­tain's shock June 23 vote to leave the EU co­in­cide with wor­ries that the euro zone's largest economies are los­ing mo­men­tum just when the ECB's pow­ers to avert an­other down­turn ap­pear lim­ited. With swathes of the ex­ist­ing stock of gov­ern­ment bonds in the euro zone now yield­ing less than zero -- forc­ing cred­i­tors to pay the bor­rower a yield for the priv­i­lege of lend­ing -- the ECB has a lim­ited amount of se­cu­ri­ties it can cur­rently buy.

So far there has been scant ev­i­dence that su­per-low yields, and now neg­a­tive yields, are do­ing any­thing to boost al­most non-ex­is­tent euro zone in­fla­tion, which the ECB tar­gets at just un­der 2 per­cent. Given the ECB has only just boosted the size of its monthly pur­chases by 20 bil­lion eu­ros and in­cluded cor­po­rate bonds in the mix, push­ing yields lower will be tough, and might not help.

"The fall in (Ger­man) Bund yields over the past quar­ter will make it in­creas­ingly dif­fi­cult to ex­pand the QE pro­gram and stick to the rule of not buy­ing bonds with a yield lower than the de­posit rate," wrote Karen Ward, econ­o­mist at HSBC. "Our best guess is that these changes are made in Septem­ber along­side an ex­pan­sion of the QE pro­gram ( for an­other six months) although the Brexit vote may in­crease the (Gov­ern­ing) sense of ur­gency."

The Bank of Eng­land kept pol­icy un­changed last week at its first meet­ing since the Brexit vote but made clear that rate cuts and fur­ther eas­ing are on the way, prob­a­bly in Au­gust.

Af­ter an ac­cel­er­a­tion in eco­nomic growth at the start of the year, mo­men­tum was fad­ing be­fore Bri­tons voted to leave the EU on June 23, and is now ex­pected to weaken even more.

But while calls for the ECB to ease fur­ther have grown louder in re­cent weeks, it is un­clear whether more mone­tary eas­ing will help, es­pe­cially in the ab­sence of fis­cal stim­u­lus.

Al­most a third of 31 re­spon­dents who an­swered an ex­tra ques­tion said they were less con­vinced of the ECB's

Coun­cil's abil­ity to in­flu­ence eco­nomic per­for­mance and in­fla­tion now com­pared with the start of the year. The con­sen­sus for euro zone GDP growth next year was slashed in the lat­est poll to 1.3 per­cent from 1.6 per­cent ear­lier, the low­est me­dian since polling for 2017 started a year ago. That is weaker than the In­ter­na­tional Mone­tary Fund's lat­est 2017 out­look which low­ered euro zone growth es­ti­mate by 0.2 per­cent­age points to 1.4 per­cent.

Econ­o­mists also cut their growth es­ti­mate for France to 1.2 per­cent for 2017 from 1.5 per­cent three months ago. Italy's was chopped to 0.8 per­cent from 1.2 per­cent. Euro zone quar­terly growth from now through Q2 2017 was trimmed by 0.1 per­cent­age point to 0.3 per­cent in the lat­est Reuters poll.

"The euro zone is late in the cur­rent eco­nomic cy­cle, and po­lit­i­cal un­cer­tainty could push the econ­omy into re­ces­sion. But my base case is a slow­down next year, not re­ces­sion," said Claus Vis­te­sen, econ­o­mist at Pan­theon Macro­eco­nomics. The poll gave a me­dian 20 per­cent like­li­hood of re­ces­sion in the com­ing year, much lower than the 60 per­cent an­a­lysts in a sim­i­lar sur­vey fore­cast for Bri­tain. De­spite all of the ag­gres­sive pol­icy moves so far, the very sub­dued in­fla­tion out­look hasn't budged. In­fla­tion, which rose 0.1 per­cent in June af­ter fall­ing or re­main­ing sta­ble for four con­sec­u­tive months, is not ex­pected to climb to the ECB's tar­get un­til at least the end of 2017.

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