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Monthly Report - Focus
Can the ECB easily extend its public sector purchase programme?

On 21 January, almost a year after announcing the start of its public sector purchase programme (QE), the ECB hinted at the possibility of implementing more stimuli to meet its inflation target. However, the prospect of more extensive QE rouses doubts as to the institution's capacity to acquire a larger volume of debt than currently planned.

Initially the programme included the purchased public debt of countries and supranational entities (such as the European Investment Bank) up to a total of EUR 50 billion a month between March 2015 and at least September 2016 (of these 50 billion, EUR 44 billion correspond to sovereign debt). This public sector purchase programme was to complement the asset-backed securities and covered bond purchase programmes in place since September 2014 (totalling around EUR 10 billion per month). An announcement was made last December that purchases would be prolonged until at least March 2017 and that they would be complemented with the reinvestment of the bonds as they mature. As the debt acquired by the ECB has a minimum maturity of two years, these reinvestment operations will not start until March 2017 (when the first debt matures).

During 2015, in response to growing concern regarding a possible shortage of QE eligible bonds, the ECB made several adjustments. In July it extended the list of national agencies whose bonds are eligible. In September it increased the limit of bonds that can be acquired from a single source from 25% to 33% (provided its position could not interfere with any debt restructuring). And, in December, it included regional and local debt in the programme. Moreover the decision to cut the deposit facility interest rate from –0.20% to –0.30% also effectively enlarged the volume of eligible debt as it added bonds whose yields are within this band (although this effect was limited due to the drop in yield caused by the interest rate cut).

With these changes, the ECB will be able to implement QE under its current terms up to approximately March 2017, the time when some of the programme's restrictions will come into play. Specifically, it is estimated that, at that time, there will not be enough eligible German debt to cover the planned purchases. However, such limitations will come into play before the end of this year should the ECB decide to increase the volume of QE purchases by, for example, EUR 20 billion as from March 2016.1

Beyond the question of the number of eligible bonds in circulation, current market conditions and the reticence of some investors to sell this kind of asset could also make it difficult to enlarge QE significantly. For example, the volume of purchases of German, French or Spanish debt included under QE already exceeds the net debt issuances planned for the coming quarters (see the table). This means that other investors will have to reduce their positions in these assets to sell them to the ECB. However, some institutions, such as insurance companies, have little incentive to do so, mainly for regulatory or liquidity reasons. Moreover other investors might also be reticent when it comes to getting rid of their public debt if the current context of risk aversion lasts much longer. On the other hand the market of asset-backed securities and covered bonds does not seem deep enough to significantly enlarge the rate of purchases.

In summary, under the current QE conditions the ECB does not appear to have much room to manoeuvre. Enlargement would therefore require adjusting some of the programme's rules to include, for example, corporate or bank debt or to be able to acquire debt in line with the stock in each country (and not, as is currently the case, in proportion to the ECB's capital key of each member state). These would be politically sensitive measures and would therefore not be easy to implement. Even more so when there is no great unanimity regarding the need to extend QE given the decreasing returns from quantitative policies and their possible adverse effects.