ECB Sees Rising Scarcity of Bonds for QE Program
Policy makers also hinted the program could be expanded again
FRANKFURT—European Central Bank policy makers warned at their September meetingof growing challenges in sourcing bonds for their €1.7 trillion ($1.91 trillion) quantitative-easing program, and hinted that the program could be extended again.
ECB officials haven’t previously acknowledged that they could face problems sourcing bonds. But President Mario Draghi said in September that ECB staff would review the design of the QE program, to ensure it didn’t run out of bonds—a move that could presage an extension.
The details of the ECB’s Sept. 7-8 policy meeting, published Thursday, reveal widespread concerns within the bank’s 25-member governing council over the failure of inflation to pick up more substantially much in the eurozone.
The ECB has rolled out unprecedented stimulus in recent years in an effort to reinvigorate the region’s weak economy, cutting interest rates below zero and buying €80 billion a month of public and private debt. Policy makers hope that by buying bonds, they can drive down interest rates, encouraging people to borrow and bolstering growth.
So far, it hasn’t been enough. Economic growth is still weak, and inflation was just 0.4% last month, far below the ECB’s target of just below 2%.
Despite that, Yet the ECB left its stimulus unchanged at its policy meeting last month, frustrating some investors who had hoped for an extension of the bond-purchase program beyond March, when it is currently due to end.
While officials “widely agreed” to hold fire for now, they expressed concerns that inflation “was still not showing convincing signs of a sustained pickup,” according to the minutes.
“Great emphasis had to be placed on the [ECB’s] willingness, capacity and ability to act, if warranted, to achieve its objective,” the minutes said.
According to its latest economic forecasts, published last month, the ECB expects inflation to increase gradually to 1.6% by 2018.
Crucially, those forecasts incorporate financial-market expectations that the ECB will provide fresh stimulus, according to the minutes.
That means if the ECB doesn’t boost its stimulus again, inflation could continue to fall short.
Howard Archer, an economist at IHS Global Insight in London, said the minutes suggested “that an extension to the ECB’s asset buying scheme remains highly possible.”
Like many economists, he expects the ECB to extend its bond purchases by six months at its December policy meeting.
Financial markets slumped earlier in the week after a report suggested that the ECB could start to taper its asset purchases, gradually reducing the monthly total, as the Federal Reserve did when it wound down its own QE program in 2014. The ECB denied that any such discussions had taken place.
According to the minutes, policy makers agreed widely in September that “financing conditions had to remain supportive” given economic risks outside the bloc, including “considerable uncertainty” around the longer-term fallout from Britain’s vote to leave the European Union.
“There is little [in the minutes] to suggest that policy makers are mulling the idea of tapering seriously,” said Jennifer McKeown, an economist at Capital Economics in London.
If the ECB does extend its bond purchases again, analysts have long warned it could face shortages in some bond markets, particularly German bunds. That is because of self-imposed constraints that restrict its purchases to bonds yielding more than minus 0.4%, and no more than 33% of most bond issues. The ECB also buys in proportion to the size of each economy.
Benoît Coeuré, an ECB board member responsible for market operations, told policy makers at the September meeting that the bond purchases were “continuing to progress smoothly overall,” according to the minutes. But he warned of “increasing scarcity of some bonds,” and “challenges to implementation in the future.”
The minutes also show policy makers are worried about the weakness of eurozone banks, whose stock prices have slid around 20% this year amid concerns about their future profitability in an environment of low interest rates. Officials warned that those weak profits and low stock prices could potentially curb future lending to the economy.
They also called again on governments to help out the ECB by boosting public investment and implementing growth-boosting reforms.