Happy birthday eurozone QE.
The European Central Bank is celebrating the two-year anniversary of its bond-buying programme this week, but it has no option but to begin phasing out the measures that have resulted in over €1.5tn in purchases over the next year, according to Pimco, the world’s largest bond fund.
Ahead of the ECB’s latest monthly meeting this Thursday – where president Mario Draghi will come under pressure to defend his monetary easing measures – Andrew Bosworth, head of portfolio management at Pimco thinks the time has come for the ECB to start thinking about turning off the taps.
“The rules it has set itself for the purchase of sovereign debt leave the ECB with no other choice but to taper purchases of government bonds,” he says.
The debate about a potential exit from QE has been stoked by rising inflation in the bloc, with consumer prices climbing above the ECB’s target at 2 per cent last month for the first time in four years.
Still, the central bank’s own forecasts show average inflation will still fall below its target of just under 2 per cent in 2019.
The ECB is currently planning on sticking to the course with QE until December at the very earliest. It will scale back its monthly purchases from €80bn to €60bn next month but has insisted the current spike in inflation is not sustainable, and it currently has no plans to trim the purchases further.
But Pimco’s Mr Bosworth thinks the boost to growth from persistently low rates and mass bond-buying is beginning to fade:
The efficacy of monetary policy is declining, and the risks to financial stability from a misallocation of resources are rising the longer monetary policy continues in its current form.
And despite subpar core inflation, growth in output is closing in on the eurozone economy’s potential.
He notes the ECB is already being tied down by its own rules on sovereign debt purchases, where the central bank cannot hold more than a third of any one member state’s sovereign debt.
Among other things, this has led to a drastic reduction in Portuguese bonds being snapped up by the ECB (read more here).
Unless the issuer limits are drastically changed, asset shortages mean the ECB will have to scale back QE from its current €80bn a month to €40bn in the first part of next year to €20bn in the second quarter as it finally winds down the programme in June 2018, say Pimco.
“We think the decision to taper further in 2018 will be communicated at the September 2017 meeting, and we expect a change to forward guidance on policy rates in the course of this year, possibly as soon as the June 2017 meeting,” says Mr Bosworth.