ECB: Full stop at €2,500bn? – Natixis

Cyril Regnat, Research Analyst at Natixis, notes that in a new development, there have been reports that the ECB intends to place a ceiling of €2,500bn on asset purchases.

Key Quotes

“At 30 September 2017, the central bank had purchased for €2,105bn of bonds under its Asset Purchase Programme (APP), of which 83% under its Public Sector Purchase Programme (PSPP). Come the end of this year, assuming that purchases reach €65bn in each of October and November and then dip to €50bn in December, the central bank’s holdings will reach almost €2,286bn (rising to €2,340bn if one added covered bond purchases completed between October 2014 and end-February 2015).”

“To comply with this new, self-imposed ceiling of €2,500bn, this means therefore that net purchases by the ECB would have to be limited to €214bn in 2018. Depending on the length of the QE extension (due to be announced some ten days from now), this means that monthly purchases would be cut to €24bn if there is a nine-month extension and to €36bn if there is a six-month extension. This ceiling therefore necessarily implies more aggressive QE exit scenarios than those currently envisaged by the market.”

“Based on the assumption QE ends one year from now (i.e. 9-month extension of APP), the only scenario (second scenario below) that would be consistent with the €2,500bn ceiling would be the one where monthly asset purchases are tapered from €60bn to €20bn from January (on which basis total asset purchases would reach €2,465bn). It is rather more likely that total asset purchases will land just above the €2,500bn ceiling (€2,585bn in our core scenario), but only if the ECB brings asset purchases to a stop at the end of September. In all cases, the introduction of a ceiling supports the view the central bank will stop net purchases by September 2018.”

“Why a calibration at €2,500bn? This very probably takes into account the stock of eligible bonds and the current holding limits, notably under the PSPP. The cumulative stock of bonds eligible for purchases under the PSPP alone nears €6,550bn: this implies that, after taking into account holding limits (33% or 50%) and assuming the average price is 110%, purchases could potentially total €2,465bn in the case of public sector bonds. By curbing total purchases in this way (while leaving PSPP parameters unchanged), this would address issues to do with scarcity, which is affecting several sovereign issuers in the Eurozone, notably Germany.”

“Even so, could the ECB confirm officially the existence of this ceiling? Probably not. In setting such a ceiling, the ECB would in effect deprive itself of the option for a further APP extension, which it will be reluctant to do as it will want to keep all its options open given uncertainties there will indeed be a rebound in Eurozone inflation. One can imagine that this proposal is coming from one of the more hawkish members of the Governing Council and that, at the end of the day, the ECB will not set such a ceiling.”