Tag: ECB

Is QE forever?

The point of Draghi’s QE is not the amount. It is the principle.

It is not the much discussed size of the ECB operation. Rather, it is the fact that the ECB has become a buyer of government bonds issued in the countries that are members of the Eurozone.

This is the really big news in the Eurozone where, until last week, the ECB’s monetary operations did not include the possibility of trading in the government securities market in the same way the Fed, the Bank of England, or the Bank of Japan do.

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Letter to The Economist

SIR – You described the ECB as moving forward at “breakneck speed”, while businesses and workers in the Eurozone are not doing likewise (“Busy, busy”, September 4th). But more should be said about the trajectory along which the ECB seems to be advancing so quickly. As the ECB embarks on QE, you note that the ABS market is “simply too small” to boost growth and the sovereign bond market, while large enough, is politically unfeasible.

I would raise a more fundamental question: What does the ECB expect to achieve by removing (from banks’ balance sheets) assets carrying positive yield and replacing them with “reserves” (that now yield a minus 0.2%)?

The notion that QE encourages bank lending and that reserves multiply into bank loans is flawed. A number of academic and practitioner articles have dispelled the myths surrounding money creation and QE. If this is true, then the ECB may be moving at “breakneck speed” toward a brick wall.

ECB drives rates below 0.05%: And now what?

The move of the ECB on June 5 was primarily aimed at restoring conditions of low and stable money market rates.

It was not difficult to predict (as I did here six weeks ago) the direct consequences of the new official rates and, notably, of the prolongation of fixed rate, full allotment tender procedures, and of the decision to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme.

Except for the end-of-June spike, money market rates appear more stable and lower.

eonia3

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