The ECB announced today that it will continue its asset purchase program (Quantitative Easing, QE) beyond March 2017, the date on which the program was initially scheduled to end. This extension will involve purchases of €60 billion per month (instead of the current €80 billion) and is currently scheduled to last until at least December 2017. An extension was anticipated by many, including some of our economists. Here are the key points to remember:
– Bonds with maturities of less than two years may now be purchased. The « two-year » limit has therefore been abolished. This is a purely technical change to address the « shortage » of assets, with no particular economic impact.
– The ECB and NCBs will be able to purchase bonds with yields below the deposit rate (currently -0.4%). It should be noted that this is an option, not an obligation. Such purchases are in fact a de facto loss for the institution, generating losses[1].
– There was no discussion of QE tapering, i.e., a gradual slowdown in asset purchases to zero (as defined by Draghi). The reduction in asset purchases by the ECB (€60 billion versus €80 billion) should therefore not be interpreted as « the beginning of the end. »
Notes:
[1] This point is often misunderstood: central banks finance their asset purchases with reserves (the famous « electronic money printing »); these reserves end up in bank accounts where they earn interest at a rate of -0.4%; the central bank will therefore have liabilities earning -0.4% and assets earning less than -0.4%, meaning that revenues are lower than costs and the operation results in a loss.
