Back
8 Jan 2015
ECB design for QE forecasted - RBS
FXStreet (Guatemala) - ECB Analysts at RBS summarised the RBS European Economics forecast for the design of QE.
Key Quotes:
"We expect that the Governing Council will announce QE at the 22 January meeting;
"We expect that the QE programme will include corporate bonds and paper issued by the EIB as well as sovereign bonds;
We expect that the sole form of quantification will be in the form of a balance sheet target, although even here we expect the communication strategy to focus attention away from the precise flow of purchases of particular assets in a specific period and towards the objective: restoring price stability (not least on account of the fact that the source of balance sheet expansion will determine the macroeconomic impact of the scheme as well as the scale).
We expect that purchases of sovereign bonds will extend beyond the belly of the curve (to avoid concentrating purchases in markets where the multiplier is likely to be low), although we do not expect a formal purchase programme across maturity buckets to be announced;
We expect that purchases of sovereign bonds will be ‘at own risk’ – this is a close call, but as we shall go on to discuss this is the ‘best’ compromise from the perspective of the signal that the Council needs to send on monetary strategy;
If purchases are conducted ‘at own risk’ then it is possible (but not quite probable) that the NCBs will have greater flexibility in the implementation of the programme, for example leading to government bonds marketed to retail investors or bonds issued by national development banks being incorporated into the scheme; in passing, there is also a greater chance that Greek government bonds are purchased given that added flexibility.
We do not expect a change in the deposit rate or an increased in required reserves in response to large scale purchases, but the introduction of capped allowances (above required reserves) where excess reserves are not subject to the deposit rate is still a possibility. However, the absence of any official discussion of this issue suggests to us that the Council believes that the deposit rate cuts already have or soon will be passed through into the rates that the commercial banks offer on deposits where financial institutions are concerned.
Finally, whilst the Eurosystem may eventually lend out specific securities in exchange for other assets (if an acute shortage of those securities leads to a movement in relative prices) we would not expect the Eurosystem to exchange bonds for cash (because that would unpick the impact of QE)".
Key Quotes:
"We expect that the Governing Council will announce QE at the 22 January meeting;
"We expect that the QE programme will include corporate bonds and paper issued by the EIB as well as sovereign bonds;
We expect that the sole form of quantification will be in the form of a balance sheet target, although even here we expect the communication strategy to focus attention away from the precise flow of purchases of particular assets in a specific period and towards the objective: restoring price stability (not least on account of the fact that the source of balance sheet expansion will determine the macroeconomic impact of the scheme as well as the scale).
We expect that purchases of sovereign bonds will extend beyond the belly of the curve (to avoid concentrating purchases in markets where the multiplier is likely to be low), although we do not expect a formal purchase programme across maturity buckets to be announced;
We expect that purchases of sovereign bonds will be ‘at own risk’ – this is a close call, but as we shall go on to discuss this is the ‘best’ compromise from the perspective of the signal that the Council needs to send on monetary strategy;
If purchases are conducted ‘at own risk’ then it is possible (but not quite probable) that the NCBs will have greater flexibility in the implementation of the programme, for example leading to government bonds marketed to retail investors or bonds issued by national development banks being incorporated into the scheme; in passing, there is also a greater chance that Greek government bonds are purchased given that added flexibility.
We do not expect a change in the deposit rate or an increased in required reserves in response to large scale purchases, but the introduction of capped allowances (above required reserves) where excess reserves are not subject to the deposit rate is still a possibility. However, the absence of any official discussion of this issue suggests to us that the Council believes that the deposit rate cuts already have or soon will be passed through into the rates that the commercial banks offer on deposits where financial institutions are concerned.
Finally, whilst the Eurosystem may eventually lend out specific securities in exchange for other assets (if an acute shortage of those securities leads to a movement in relative prices) we would not expect the Eurosystem to exchange bonds for cash (because that would unpick the impact of QE)".