The European Central Bank (ECB) will relaunch a bond-buying programme in November 2019.
While the ECB ended its bond-buying programme in December 2018, maturities from its sovereign debt portfolio is reinvested in sovereign bonds, maintaining the ECB’s systemic role in capital markets. Citing ECB sources in Frankfurt, the news magazine Der Spiegel claims the decision to relaunch the bond-buying programme by the end of 2019 is already taken.
There is little opposition to the second wave of quantitative easing, with inflation well below the 2% target, business confidence in tatters, and decelerating growth across Europe. The Sino-American trade war, the credible threat of a no-deal Brexit, and parallel crises in emerging economies undermine growth in an export-driven EU economy.
The President of the ECB, Mario Draghi, is due to be succeeded by the Chair of the International Monetary Fund Christine Lagarde on October 31st. Lagarde is expected to be a guarantor of continuity in monetary policy, allowing Mario Draghi to announce a second “whatever-it-takes” type stimulus.
Markets have seized to expect an ECB rate hike since April, while most analysts project a further rate cut on Thursday.
The ECB is considering sliding further into negative interest rates territory, increasing the cost for banks to park their cash at the central bank. ECB policy is driven by a sense of competitive devaluations. Following Chinese and US Fed monetary measures, a weaker Euro is possibly seen as necessary to restore the competitiveness of European exports. In fact, in a statement from the White House on June 3, US President Donald Trump accused Europe and China of manipulating their currencies to gain a competitive advantage over the dollar; since the US Fed has announced an interest rate cut.
Bond markets have already factored in quantitative easing in Europe, with Germany’s 10-year bond yield – the benchmark Bund – falling below the ECB’s deposit rate.
One technical challenge for the ECB is its policy not to buy more than a third of the sovereign debt of any Eurozone member state. That is a ceiling that Frankfurt is close to breaching, having bought €2 trillion worth of sovereign bonds since 2015.
The idea of limiting exposure to member-state debt is to limit the systemic risk in case of debt-restructuring, as in the case of Greece. One option for the ECB is to demand to bolster its status as a creditor by gaining a formal veto over restructuring policy.