Comments from interviews with two members of the governing council released this week indicate that the quantitative easing programme may be allowed to expire in 2018.
Ewald Nowotny, governor of the National bank of Austria, said that allowing QE to run out this year would be an option if the economy continues to do well. The statement marks a departure from what has hitherto been the ECB’s sole aim of restoring inflation to the eurozone economy.
Given that inflation in Europe has remained stubbornly resistant to the ECB’s efforts to bring it towards its target of “close to but below 2% inflation”, some analysts believed that quantitative easing would have to be extended beyond this year.
An investor told GlobalCapital in an interview in late 2017 that the ECB’s decision to reduce the scale of its purchase programme from €60bn to €30bn per month was motivated “by the scarcity of eligible assets”. “Growth is going well, but inflation is still moving in the wrong direction... so the ECB is still committed to supportive monetary conditions.”
Nowotny believes that the 2% target should not be regarded too inflexibly, saying that it is not easy to explain why 1.9% would be better than 1.5%.
Nowotny’s comments chimed with those of Benoit Coeure, who said in an interview with a Chinese magazine at the weekend that he sees a reasonable chance that the ECB’s extension of the asset purchase programme in October 2017 will be the last.
When it was announced, ECB president Mario Draghi was very careful to stop short of suggesting that there would be no more extensions. The central banker said only that QE “would not come to a sudden stop”, which was widely interpreted as implying that there could well be another stage of tapering.
The cut to the pace of quantitative easing has likely been fully priced in with only a slight rise in yields. The beginning of the ECB’s reinvestments goes some way to mitigating the withdrawal of half of the ECB’s stimulus. The news that the programme could be terminated entirely this year has not, so far, had an effect on government bond yields.
However, this may be due to the influx of cash typical at the beginning of the year. Investors have a great deal of cash to put to work as the success of Ireland’s benchmark indicates. The sovereign’s 10 year deal attracted a book of more than €14bn and was able to tighten its spread by 3bp, pricing at 2bp over mid-swaps.
Bank Nederlandse Gemeenten will follow suit with its own 10 year euro Reg S note on Thursday and the European Financial Stability Facility has sent out a request for proposals for a deal next week. Belgium is also expected to hit screens for a long dated green bond.
While Ireland’s benchmark will likely be the largest of the day, a pair of sterling deals targeting a combined £1.5bn have also come to market. The European Investment Bank’s £1bn no-grow tap received £1.7bn of orders and also managed to pull in its spread by 2bp.
Craig McGlashan, SSA, MTN and CP editor +44 20 7779 7299
Lewis McLellan, SSA reporter +44 20 7779 7350
William Chambers, niche currency, MTN and CP reporter +44 20 7779 7368
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Ireland first out the gate in euros
