How much of a policy error will the ECB make today?

Welcome to January 22nd 2015 which is likely to be known in future as ECB QE day where the ECB stands for European Central Bank and the QE for Quantitative Easing. Of course there is a small chance that it will not happen in which case it will be known for a while as ECB no-show day! Many eyes will turn to the policy announcements which arrive at 12:45pm UK time for interest-rates and at 1.30pm for the press conference when any extraordinary monetary measures will be announced such as QE. Also there can be some variety in the timing during the press conference as it is not always at its beginning that the changes are announced, sometimes ECB Presidents like to announce a change with something of a flourish during the press conference itself and on at least one occasion actual market purchases have started there and then. The other route taken is to make everybody wait for a fact sheet which is released after the press conference ends. Good job that’s all clear?!

Buy the rumour and sell the fact

The paragraph heading above has been a city aphorism for as long as I can recall and I am sure much longer! This is happening right now. The buy the rumour phase was where the bonds of the Euro area countries surged over the past weeks and months. The sell the fact stage has come over the past 24 hours where bond prices have fallen and yields risen in a complete reversal of the previous trend. For example the ten-year bond yield in Germany pushed back above 0.5% yesterday and the five-year yield which has spent the past week or two in negative territory has returned to a positive yield.

Also if we go much further afield there have been some substantial falls in Japanese Government Bonds this morning. The ten-year benchmark has risen back up to 0.32% after falling to 0.19% as recently as Monday. Profit-taking or panic? Only time will tell…

Where the ECB finds itself

This is quite simply between a rock and a hard place. If you look at the likely developments in 2015 then there will be three stimuli for the Euro area economy. These are the fall in the oil price which seems for now at least to have settled below US $50 for each of the two major benchmarks putting it some 54% lower than a year ago. Secondly we have the impact of past ECB actions on the money supply and earlier this week we were told this.

Further net easing of credit standards mainly driven by improving cost of funds…..Increase in demand for loans across loan categories with rise in firms’ loan demand largely driven by financing needs for fixed investment.

Also monetarists will be noting this.

 with the narrow monetary aggregate M1 growing at an annual rate of 6.2% in October

Added to this we have the recent falls in the value of the Euro with the effective or trade-weighted exchange rate falling from the recent peak of 100.59 just over a month ago to 95.19 yesterday.

On this basis you might be thinking that the ECB should in fact do nothing today and there is a strong case for that if one looks at reality and applied logic. But instead we live in a world where media pressure looks likely to force them to do something leading to me to be reminded of this from the glam-rock band The Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To Blockbuster

How did we get here?

With apologies to Talking Heads for twisting their lyrics we got here on two motorways or perhaps I should say autobahns. One is the way that the Euro area economy has struggled and stagnated overall. Last year was supposed to be the year of recovery and instead we saw struggles and stagnation with the year to the end of the third quarter only registering economic growth of 0.8%. The other has been from the ECB itself which targets consumer inflation at a rate of just below 2% and has been very proud of itself when it achieved that. Instead we note that it is now here.

Euro area annual inflation was -0.2% in December 2014, down from 0.3% in November. This was the lowest rate recorded since September 2009.

Even worse from the point of view of its inflation target is that the effect of the oil price fall has not fully filtered through and the secondary and tertiary impacts will of course be on their way too.

Thus if we look at it like that and turn to the central banking play book it would say ease.


Whilst the ECB may not have the “99 problems” that Jay-Z sung about it has quite a few to my mind. For a start the Euro area’s political establishment has in effect passed economic policy virtually entirely to it something which was reinforced by the recent European Court of Justice decision. In itself this means a transfer from democracy to a form of technocratic unelected government and it also leaves the ECB trying to do things for which it has no instruments or weapons.

Added to this is the issue of timing. You see if it wanted to influence economic events in early to mid-2015 it need to act at least a year ago and more realistically in late 2013. So it is out of phase and what it does today may be inappropriate at best when in impacts in 2016.

Of course not all Euro area countries are in the same situation and an example of the inequality has been provided this morning by the Italian statistics office.

With respect to the same month of the previous year the calendar adjusted industrial turnover index decreased by -1.6%.

What is expected today?

Yesterday there were heavy hints that the ECB QE programme would be of 50 billion Euros a month and extend well into 2016. In my opinion the total size has to end up being of the order of 1 trillion Euros as ECB President Mario Draghi has repeated this number again and again. If you have been playing a drinking game version of bingo you would have been regularly tipsy at ECB press conferences. However perhaps not all of the 1 trillion Euros will be announced today.

What is it expected to do?

Advocates of QE have changed the way that it supposedly benefits us a number of times in the credit crunch era as one claim gets redacted and replaced by another.For example one of the early Bank of England efforts was this.

This evidence suggests that the policy had economically
significant effects — equivalent to a 150 to 300 basis point cut in Bank Rate — but there is considerable uncertainty around the precise magnitude of the impact.

This has been replaced by this on the Bank of England website.

This process aims to directly increase private sector spending in the economy and return inflation to target.

Actually it is all the changes in the explanations which are eloquent. After all if QE has a powerful economic impact then after US $3.7 trillion from the United States, nearly 500 million Swiss France from the Swiss, £375 billion from the UK and more Yen than most people can imagine or count from the Bank of Japan we should be saved by now right? Oh wait a minute…..


The words of Buzz Lightyear come to mind today.

To Infinity! And Beyond!

Can we get off the monetary easing bandwagon or is it all about presentation and spin these days? The era of “open mouth operations” for monetary policy is clearly with us but let me think ahead here and pose a question. What plans does the ECB have for exiting QE? You should never start something that you can not finish and regular readers will remember me pointing this out about the Bank of England which will kindly prove my point today.

As set out in the MPC’s statement of 8 January, the MPC has agreed to make £4,350mn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 22 January 2015 of a gilt owned by the Asset Purchase Facility (APF).

Wasn’t it Limahl who sang about this topic?

Neverending story
(Aah, aah, aah)
Neverending story
(Aah, aah, aah)

Reach the stars
Fly a fantasy
Dream a dream
And what you see will be

I will be updating today’s edition as events progress and should nothing be announced then I would suggest that markets will be singing along to Bob Marley and the Wailers.

Exodus: Movement of Jah people! Oh-oh-oh, yea-eah!

Songs for ECB QE

We cannot allow this day to pass without a playlist so here are some suggestions.

Pump It Up by Elvis Costello and the Attractions

Pump Up The Volume by MARRS

Money,Money,Money by ABBA

Bills,Bills,Bills by Destiny’s Child

Wrecking Ball by Miley Cyrus

Bang,Bang by Jessie-J

You Can’t Always Get What You Want by the Rolling Stones

We Can Work It Out by the Beatles

Should it go wrong then there are these.

Help! by the Beatles

Misery by the Beatles

11:15 am update

The first addition is Money For Nothing by Dire Straits from Michael Hewson of CMC Markets.

12:45 pm update

We have the opening salvo from the ECB’s bazooka which is simultaneously something of a damp squib and a tease!

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.05%, 0.30% and -0.20% respectively.Further monetary policy measures will be communicated by the President of the ECB at a press conference starting at 2.30 p.m. CET today.

Boom!Here are the inital details of the new plan. The meat of the issue is in the first section and for the reasons stated above I think that this is a mistake.

The Governing Council of the European Central Bank (ECB) today announced an expanded asset purchase programme. Aimed at fulfilling the ECB’s price stability mandate, this programme will see the ECB add the purchase of sovereign bonds to its existing private sector asset purchase programmes in order to address the risks of a too prolonged period of low inflation.

The programme will encompass the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year. Combined monthly purchases will amount to €60 billion. They are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.

The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy. In both cases, this contributes to an easing of financial conditions.

Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). Accordingly , the interest rate applicable to future TLTRO operations will be equal to the rate on the Eurosystem’s main refinancing operations prevailing at the time when each TLTRO is conducted, thereby removing the 10 basis point spread over the MRO rate that applied to the first two TLTROs.

Third, in line with our forward guidance, we decided to keep the key ECB interest rates unchanged.

The “additional eligibility criteria” is something that seems likely to apply initially to Cyprus and Greece. Ironically these are the places which might actually benefit!

Also the ECB has opened a new front with this statement from Mario Draghi.

This is really big! “We will buy bonds with a negative yield”


29 thoughts on “How much of a policy error will the ECB make today?

  1. Shaun

    On the assumption its 50Billion a month, how exactly will the new money be spent? are they going to buy government or corporate bonds or exchange for “Loan products” such as mortgage backed assets etc?

    Will it be proportional to national GDP, i.e. Germany and France will get the lion’s share of the cash or will it be entirely at Mr Draghi’;s discretion where the ECB “spends” the cash?

    The announcement itself is not going to be the interesting thing, the use of the money will be. Sharing the spoils of QE between just shy of 2 dozen nations is not an easy task.

    • Very good point Anand. I would also like an explanation as to how one can have a single currency and single central bank which specifically excludes the purchases of assets of any one nation. How will this play in the Greek election, and more importantly afterwards. My view is that old Schauble has already decided to kick Greece out, which is a pretty appalling way to treat a small member nation when you think about it. Still, all (or if not all, most) will be revealed at lunchtime…

      • Hi Andy and Shaun,

        I agree with you Andy in that I fear that Greece is about to get shafted once more. The Greek Finance Minister seems a little nervous too:

        My musical offering comes in the form of a duet and is aimed primarily at M. Draghi, but names like Lagarde and Barroso would work too! Donna Summer and Barbra Streisand:

        Tell him to just get out, say it clearly, spell it out:
        Enough is enough is enough
        I can’t go on, I can’t go on no more no
        Enough is enough is enough
        I want him out, I want him out that door now.

    • Good point.

      It’s going to be a proper bunfight over who the beneficiaries of EU taxpayer largesse should be.

      Watching various countries banking classes turn on each other could be quite apopcorn moment for Forbin.

  2. Hi Shaun

    When you talk about “exiting QE” you surely don’t believe that there will be an exit do you? I, like a great many more, believe that this is a stealth debt monetisation process which will never be reversed anywhere it has been implemented.

    BTW please accept my condolences upon your fathers death.

    • Hi Bob J and both welcome to my part of the blogosphere and thank you for your kind words.

      Let me go a little further. I was wondering the moment ECB QE began if they might find themselves on a road where they end up buying pretty much the lot. There are two ways of thinking of this. Firstly the obvious route of buying all the government debt. But there is another road somewhere around holding 50% of it. That is because there are virtually permanent holders of the rest such as annuity providers pension funds and so on. This means that the “everything available” option comes a lot earlier than a 100% holding.

      Oh and there would be an exit strategy if I was involved!

  3. Mental.In two years,the ECB will have 1.2 trillion of junk on it’s hands and no buyer in sight.

    Who was it who said the definiton of insanity was doing the same thing again and expecting a different result.

    • Quote is often attributed to Afred Einstein but it’s not clear he ever said it or that it’s a very good def of insanity. This might be more accurate:
      when a person cannot distinguish fantasy from reality, cannot conduct her/his affairs due to psychosis, or is subject to uncontrollable impulsive behavior.

      Or in the context of these comments, the uncontrollable impulse to print money when there’s little evidence that it will benefit the broader economy.

      Shaun, sorry to hear your family news.

  4. The BBC have given us a lovely infographic of everything we needed to know about ECB QE. Unfortunately most people are probably wondering why we need parts 2, 3, & 4 and cant just go from point one straight to point five. After all giving the money straight to the people would have the same result yes?

    Ofcourse, doing that wouldn’t help out our banking sector though, would it?
    The only question is… how far has the can actually been kicked, this time?

    • Number 3 in the infographic declares that the process helpfully lowers interest rates too – and there was I thinking that rates were quite low (and tanking towards minus) already.

      The whole Draghi big-reveal looks pretty desperate to my eyes. Significant that they bumped up the monthly number to 60 billion, after trailing 50 for a few days and seeing the market reaction.

      • Yes. Both sad and a little scary that they are driven by media reaction rather than sound economic reasoning. The whole policy smacks of knee jerk response rather than forward planning.

        I see poor old Greece has been left to the wolves with little or no explanation too.

  5. Pingback: EBC musiał działać, bo europejskie rządy są bezsilne

  6. Thanks Shaun,
    You are the only commentator that I’ve read to ask that crucial question you pose”What plans does the ECB have for exiting QE?”……..also how on earth can buying bonds with a negative yield be useful? I’m looking forward to your next post on this subject.
    With much sympathy on your loss.

    • Hi Hoppingpot and thank you for your condolences

      I guess the media mostly has a short attention span and thinking ahead is way beyond that! As to the buying bonds with negative yield it breaks the accounting method which the ECB established in the Greek crisis where you mark bonds to the redemption price of 100. So if you buy it at 101,102,103 etc. you have to immediately declare a loss.

      Mario Draghi did mention “hypothetical losses” in the press conference but I think that the media scrum missed its significance.

  7. Hi Shaun, a very silly move today when none was required. On the bright side investors should do well but will have to watch the Euro exchange rate if they’re not in the EZ.

    Not too sure what it’s going to do for the EZ economy which imo was already on course for reasonably good growth (for these times) in 2015.Maybe the ECB will manage to shoot itself in it’s own foot at end 2016/beginning 2017 when current M1 growth interweaves itself with circa 1.2 trillion Euro QE and leaves them with inflation coming out of their ears!(oil can’t keep falling and by then the disinflationary effect will have disappeared. There are those who believe oil will start on the up escalator in a moderate fashion this Spring/Summer)

    • Hi Noo2Economics

      If we think of each monthly QE installment as separate then the last one in September 2016 will reach its full effect in 2018. About which we know precisely nothing right now! So a media and PR success today but more likely to be a failure than a success as you say. If we were more cynical then we would say that they know things will pick up and want to be able to claim the credit.

  8. All sympathy on the loss of your father.

    Coin clipping will always be the same in reality, by whatever new name they may try to use to disguise it!

    • Hi Drf and thank you for your condolences

      Also I enjoyed the reminder about coin clipping from back in the days when currency had real value (i.e silver or gold). In some ways the rules of the game never change do they?

  9. Hi Shaun
    Exit for all QE by the CBs is debt monetisation. The FED is doing it, BoE is, BoJ will and now ECB will have to. As ‘everyone’ will do it, the risk to sharp falls/changes in exchange rates is diminished , just all ‘fiats’ will be worth less in the ‘real world’ ( if such a thing exists anymore) and what’s new about that!
    Finally the last ‘gold standard’ , germanic productivity, is devalued, the vampire squid rules everywhere.

    • Hi JW

      I have discussed that issue in some of my replies already. Much may change going forwards but I agree there are quite a few roads forwards which end up with debt monetisation by the ECB. What if someone leaves the Euro then? Ouch!

      Does that view make you a gold bull?

      • No, its a pretty useless lump of metal, seemingly ‘adored’ by its sycophants. My investments are in property ( geographically and currency spread ), bonds and my kids ( mainly).
        By the way I posted last night probably after you ‘closed’, offering my condolences for your loss and referring to the Citi report about ‘income-less jobs’ .

  10. Are Eurobonds overvalued ? Some have Negative nominal yields, let alone real yields. Others are at risk of default.

    Who is holding all these low yielding bonds ? Who stands to translate a book profit to actual profit if the ECB buys bonds at a price higher the the banksters would ?

    Can I suggest that QE is a massive fraud designed to enrich banksters by getting the taxpayer to overpay on eurobonds …

    In preference to enriching banksters again, The money could be spent elsewhere, for example increasing the scientific research budget for nuclear fusion. That might just solve the energy problem and benefit humanity.

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