Column: Far from taper, ECB could tee up another $1 trillion of QE

Wednesday, July 21, 2021
Column: Far from taper, ECB could tee up another $1 trillion of QE © Reuters. The complete Europa series, with the new 100- and 200-euro banknotes, is displayed during a presentation at the ECB headquarters in Frankfurt, Germany, September 17, 2018. REUTERS/Kai Pfaffenbach/File Photo/File Photo

By Mike Dolan

LONDON (Reuters) - If you're waiting for the imminent end of central banks' bond buying "quantitative easing" - make sure you're sitting comfortably. The European Central Bank could well throw another $1 trillion log onto the fire as soon as this week.

As government borrowing rates sank across the world this week and stocks shivered, it appeared as if markets were having second thoughts about the long-held assumptions about the end of pandemic lockdowns, searing economic rebounds and widespread reflation.

COVID headlines this month have certainly given investors plenty to ponder, even if a complete rethink of vaccine-led recoveries still seems unnecessary.

But possible signals from Thursday's ECB policy meeting could be just as big a culprit behind the gloomy reading coming from world bonds. Another post-pandemic wave of bond buying looks likely in Europe, inevitably spilling through other markets even as other central banks start to gradually wind down emergency COVID-related stimuli.

Much like the Federal Reserve did last year, the ECB this month announced changes to its long-term strategic goals sooner than many had been expecting. While not fully apeing the Fed's move to an average its inflation target over time, it did make what looked like small tweaks but which could have huge bond buying implications.

On July 8, the ECB shifted its inflation target to 2% from "below but close to 2%" and accepted the inflation rate could temporarily deviate above or below.

Hardly seismic on the face of it. But when you realise the ECB's own inflation forecast for as far away as 2023 is just 1.4% - even after its massive 1.85 trillion euro pandemic bond buying plan (PEPP) expires next March - then you see how much work it still has to do to make that 2%.

This week it plans to shift its policy guidance to reflect that new strategy - with ECB chief Christine Lagarde insisting ECB policy needs to be "especially forceful and persistent" when interest rates are already below zero.

For ECB-watchers, that underlines the fact that the ECB now sees bond buying as its main policy tool and will use that forcefully and continually until it meets its goals.

For a central bank that briefly hiked interest rates in 2008 amid one of the biggest banking crashes in modern history - and repeated the error in 2011 as the euro sovereign debt crisis unfolded - the lesson of premature tightening has been learnt the hard way.

So if the PEPP is left to expire in March - assuming the pandemic does actually end by then - that "force" will have to be applied to its standing Asset Purchase Programme (APP) that was in place before the pandemic but is still running alongside the PEPP at just 20 billion euros a month.

Katharine Neiss, chief European economist at asset manager PGIM Fixed Income, reckons the issue is now one of ECB credibility as it fights years of sub-target inflation expectations.

"Its future effectiveness as an institution relies on backing its talk with the policy walk," she said.

WALK THE TALK

Neiss said she sees APP purchases expanded as much as four-fold to as high as 80 billion euros per month after March.

That would equate to an additional 720 billion euros over 12 months to March 2023 - similar in magnitude to the asset purchase announcement made at the height of the pandemic in March 2020 and equivalent to a third of all the assets the ECB has bought since 2014 to date.

And that tally assumes euro zone inflation is sustainably 2% by March 2023. If it's not, another three months of that would top the $1 trillion mark - or a trillion euros more within six months of that.

Right now the market certainly doesn't see inflation at 2% over that horizon. The euro 5year/5year forward inflation swap is still stuck just above 1.5% - the main market-based indicator of long-term inflation expectations - and hasn't peeped above 2% since 2014.

But neither did forecasters see this policy shift coming. Only last month, the ECB's own survey of analysts expected the PEPP to be ended in March and the APP left unchanged.

To be sure, reports of splits within the governing council mean such forceful guidance may yet face resistance. And some expect the ECB to wait for new forecasts in September before being more specific.

PIMCO Portfolio Manager Konstantin Veit reckons this week's meeting will simply discuss necessary tweaks to ECB language on interest rate guidance and its framework. In September, he sees a more modest "upsizing" of the APP to 60 billion euros a month as the PEPP ends with progress on inflation still "meagre".

Despite criticism of QE in other countries, there's little doubt that the ECB itself sees asset purchases along with negative interest rates and forward guidance as effective tools to lift inflation. A working paper published by the ECB last month concluded that euro zone inflation would have been 0.75 percentage points lower than the 1.3% recorded in 2019 if those tools had not been adopted over the previous 6 years.

But for world markets at large, an additional trillion dollars or even euros worth of bond buying by at least one of the "Big 4" central banks over the next two years can well be viewed as yet another supply shock of sorts.

With the ECB already buying far more bonds than the governments' underlying fiscal deficits are creating, the long-standing shortage of "safe assets" needed by banks, pension and insurance funds is likely to see considerable overspill elsewhere - weighing on bond yields everywhere.

Even if the Fed does start to taper its QE, the ECB doesn't look like it's going anywhere for a long time.

(by Mike Dolan, Twitter: @reutersMikeD. Charts by Saikat Chatterjee. Editing by Jane Merriman)

Leave your comment
31-07-2021 18:16:01 (UTC+7)

EUR/USD

1.1871

-0.0015 (-0.13%)

Summary

↑ Sell

Moving Avg:

Buy (5)

Sell (7)

Indicators:

Buy (1)

Sell (7)

EUR/USD

1.1871

-0.0015 (-0.13%)

Summary

↑ Sell

Moving Avg:

Buy (5)

Sell (7)

Indicators:

Buy (1)

Sell (7)

GBP/USD

1.3902

-0.0059 (-0.42%)

Summary

Sell

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (1)

Sell (8)

USD/JPY

109.72

+0.26 (+0.24%)

Summary

↑ Buy

Moving Avg:

Buy (10)

Sell (2)

Indicators:

Buy (7)

Sell (1)

AUD/USD

0.7345

-0.0050 (-0.68%)

Summary

Neutral

Moving Avg:

Buy (8)

Sell (4)

Indicators:

Buy (3)

Sell (6)

USD/CAD

1.2472

+0.0028 (+0.23%)

Summary

↑ Buy

Moving Avg:

Buy (11)

Sell (1)

Indicators:

Buy (5)

Sell (1)

EUR/JPY

130.25

+0.13 (+0.10%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (5)

Sell (3)

EUR/CHF

1.0751

-0.0021 (-0.19%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (4)

Sell (3)

Gold Futures

1,812.30

-18.90 (-1.03%)

Summary

Neutral

Moving Avg:

Buy (11)

Sell (1)

Indicators:

Buy (3)

Sell (5)

Silver Futures

25.547

-0.235 (-0.91%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (4)

Sell (2)

Copper Futures

4.4785

-0.0450 (-0.99%)

Summary

Buy

Moving Avg:

Buy (7)

Sell (5)

Indicators:

Buy (5)

Sell (3)

Crude Oil WTI Futures

73.72

+0.10 (+0.14%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (4)

Sell (5)

Brent Oil Futures

75.14

+0.04 (+0.05%)

Summary

↑ Buy

Moving Avg:

Buy (8)

Sell (4)

Indicators:

Buy (6)

Sell (1)

Natural Gas Futures

3.915

-0.144 (-3.55%)

Summary

↑ Sell

Moving Avg:

Buy (2)

Sell (10)

Indicators:

Buy (0)

Sell (9)

US Coffee C Futures

180.38

-16.12 (-8.20%)

Summary

Neutral

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (2)

Sell (5)

Euro Stoxx 50

4,089.30

-27.47 (-0.67%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (9)

S&P 500

4,395.26

-23.89 (-0.54%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (6)

Sell (2)

DAX

15,544.39

-96.08 (-0.61%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (8)

FTSE 100

7,032.30

-46.12 (-0.65%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (7)

Hang Seng

25,908.00

-335.62 (-1.28%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (8)

Sell (0)

US Small Cap 2000

2,223.25

-16.78 (-0.75%)

Summary

↑ Buy

Moving Avg:

Buy (11)

Sell (1)

Indicators:

Buy (8)

Sell (0)

IBEX 35

8,675.70

-110.60 (-1.26%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (9)

BASF SE NA O.N.

66.310

-0.535 (-0.80%)

Summary

↑ Sell

Moving Avg:

Buy (1)

Sell (11)

Indicators:

Buy (0)

Sell (11)

Bayer AG NA

50.36

-0.71 (-1.39%)

Summary

↑ Sell

Moving Avg:

Buy (2)

Sell (10)

Indicators:

Buy (0)

Sell (9)

Allianz SE VNA O.N.

210.35

-1.30 (-0.61%)

Summary

↑ Sell

Moving Avg:

Buy (1)

Sell (11)

Indicators:

Buy (1)

Sell (9)

Adidas AG

306.85

-1.92 (-0.62%)

Summary

↑ Sell

Moving Avg:

Buy (3)

Sell (9)

Indicators:

Buy (0)

Sell (10)

Deutsche Lufthansa AG

9.548

-0.332 (-3.36%)

Summary

Buy

Moving Avg:

Buy (8)

Sell (4)

Indicators:

Buy (5)

Sell (3)

Siemens AG Class N

131.82

-1.24 (-0.93%)

Summary

↑ Sell

Moving Avg:

Buy (1)

Sell (11)

Indicators:

Buy (0)

Sell (10)

Deutsche Bank AG

10.685

-0.170 (-1.57%)

Summary

Sell

Moving Avg:

Buy (5)

Sell (7)

Indicators:

Buy (2)

Sell (5)

 EUR/USD1.1871↑ Sell
 GBP/USD1.3902Sell
 USD/JPY109.72↑ Buy
 AUD/USD0.7345Neutral
 USD/CAD1.2472↑ Buy
 EUR/JPY130.25↑ Buy
 EUR/CHF1.0751↑ Buy
 Gold1,812.30Neutral
 Silver25.547↑ Buy
 Copper4.4785Buy
 Crude Oil WTI73.72↑ Sell
 Brent Oil75.14↑ Buy
 Natural Gas3.915↑ Sell
 US Coffee C180.38Neutral
 Euro Stoxx 504,089.30↑ Sell
 S&P 5004,395.26Buy
 DAX15,544.39↑ Sell
 FTSE 1007,032.30↑ Sell
 Hang Seng25,908.00↑ Buy
 Small Cap 20002,223.25↑ Buy
 IBEX 358,675.70↑ Sell
 BASF66.310↑ Sell
 Bayer50.36↑ Sell
 Allianz210.35↑ Sell
 Adidas306.85↑ Sell
 Lufthansa9.548Buy
 Siemens AG131.82↑ Sell
 Deutsche Bank AG10.685Sell
Mua/Bán 1 chỉ SJC
# So hôm qua # Chênh TG
SJC Eximbank5,660/ 5,720
(0/ 0) # 643
SJC HCM5,655/ 5,725
(-15/ -15) # 688
SJC Hanoi5,655/ 5,727
(-15/ -15) # 690
SJC Danang5,655/ 5,727
(-15/ -15) # 690
SJC Nhatrang5,655/ 5,727
(-15/ -15) # 690
SJC Cantho5,655/ 5,727
(-15/ -15) # 690
Cập nhật 31-07-2021 18:16:03
Xem lịch sử giá vàng SJC: nhấn đây!
ↀ Giá vàng thế giới
$1,813.62-16.91-0.92%
Live 24 hour Gold Chart
ʘ Giá bán lẻ xăng dầu
Sản phẩmVùng 1Vùng 2
RON 95-IV2178022210
RON 95-II,III2168022110
E5 RON 92-II2049020890
DO 0.05S1637016690
DO 0,001S-V1672017050
Dầu hỏa1539015690
ↂ Giá dầu thô thế giới
WTI$73.40+0.280.38%
Brent$75.06+0.020.03%
$ Tỷ giá Vietcombank
Ngoại tệMua vàoBán ra
USD22.820,0023.050,00
EUR26.579,9627.963,10
GBP31.210,5432.514,30
JPY204,45215,17
KRW17,3221,09
Cập nhật lúc 18:12:28 31/07/2021
Xem bảng tỷ giá hối đoái