The term QE (Quantitative Easing) program is not the official name of the ECB program, but only describes the monetary policy method in which the central bank buys debt instruments in order to lower the level of market interest rates. The QE program is called the official language of the ECB Asset Purchase Program (Asset Purchase Program, APP) and was launched in early 2015. The application initially consisted of three individual purchase programs
- covered bonds (CBPP 3from October 2014),
- asset-backed securities (ABSPPbeginning of November 2014) i
- public sector securities (PSPPfrom March 2015).
- In June 2016, a securities purchase program for the corporate sector (CSPP) added.
A more detailed description of the individual programs can be found at the end of this article.
The ECB did not set specific purchase volumes for individual programs, but only monthly targets for the entire application.
- March 2015 – March 2016: 60 billion euros
- April 2016 – March 2017: EUR 80 billion
- April 2017 – December 2017: € 60 billion
- January 2018 – September 2018: 30 billion euros
What exactly is the ECB buying?
A look at the securities purchased each month shows that the ECB has changed the structure of its purchases and has been active to varying degrees under different programs. The monthly volume of purchases was also not always exactly at the level of the announced 60 or 80 billion euros – however the ECB did so in the appropriate phases on average he bought an almost exact volume announced.
The different weights of the subroutines become even clearer in the table below. This shows how high the share of individual programs was in individual months since the application was launched in March 2015. This shows that the ECB has recently reduced the percentage of government bonds it purchases (from a peak of over 90% to around 80% recently).
What to look for: Concrete implementation and reinvestment of maturing bonds
In the coming months, it will be important to see how the ECB actually implements the announced reduction in purchasing volume as this will have different effects on the affected market segments. As shown above, the ECB has shown from the outset of its purchase programs that it is able and willing to actually deliver the announced volumes. This means that all APP assets on their balance sheet follow the rate shown in the chart below (red dotted line) and should total around 2.6 trillion euros by the end of September 2018 – the only question that remains is that the large white gap in the chart is it is actually full.
It should also be taken into account that an application will have an impact long after it has actually ended. Already in December 2015, the ECB announced that it would reinvest the yields on bonds held to maturity and renewed this promise at its October Council meeting. For example, if a German government bond matures in 2019 and the ECB is paid by the German state, it will use that money from today to buy (German) government bonds again. So his holdings of government bonds will not necessarily decrease, and neither will his presence in the markets decrease much – it just won’t create new money to buy government bonds.
QE purchases by country
At the beginning of the PSPP (ie the government bond program), the ECB announced that the volume of purchases should be based on the capital key of the participating countries. However, the ECB has deviated significantly from this target: it has bought more government bonds from major euro area countries than would have been appropriate based on the capital key. For example, German government bonds now account for almost 27% of a purchased government bond portfolio, although the German equity key is just under 18%.
This “preference” for large countries may be due, among other things, to the fact that smaller countries simply do not have enough bonds for the ECB to achieve its intended volume of purchases. Time will tell if the ECB will change its buying behavior if it only has to buy a smaller amount of government bonds.
Purchases made under the QE program now account for almost half of the total ECB balance sheet of almost € 4.4 trillion. If the ECB lowers the volume of monthly bond purchases from January, the ECB’s balance sheet is expected to initially grow at a slightly slower pace in the short term. In order to assess the real expansionary effect of monetary policy, one should also observe how other items of the balance sheet are changing, although from today’s perspective it cannot be estimated.
Glossary: Programs in detail
First Covered bonds purchase program (Covered Bond Repurchase Programs, CBPP) has already been taken by the ECB in 2009 to stabilize the market for these securities (eg Pfandbriefe) after the financial crisis and to counter the banks’ problems with refinancing. During the year, securities with a total value of EUR 60 billion were purchased. The second CBPP was then implemented from November 2011 to October 2012. The current third CBPP was adopted in October 2014.
This Asset-backed securities purchase program (Asset-backed securities purchase programs, ABSPP) was launched in September 2014 in connection with the Covered Bond Purchase Program (CBPP 3). ABS papers are purchased from the primary and secondary markets.
As part of the public sector securities purchasing program (Public Sector Purchasing Programs, PSPP) since March 2015, public sector securities have been purchased, such as government bonds and debt securities of European institutions and agencies. There are specific rules for purchasing under the PSPP. For example, government bonds can only be bought on the secondary market due to the prohibition of state monetary financing. Only securities with a maturity of more than one year may be purchased. Moreover, the ECB does not want to buy more than 33% of all securities on secondary markets.
FROM Corporate Sector Securities Repurchase Program (Corporate Sector Purchasing Programs, CSPP) since June 2016, bonds of companies from the euro area have also been purchased. Banks and companies whose bonds have not been rated by a rating agency at least “investment grade” are excluded. The bonds must have a maturity of six months to 30 years and can be purchased on both the primary and secondary markets.