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Saturday, 27th April 2024 |
| Ireland’s QE programme operated through CB’s 18 primary dealers |
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It appears that while the ECB is closely co-ordinating the QE programme it is allowing a degree of flexibility in daily implementation to National Central Banks (NCBs). The ECB operates QE by purchasing through the National Central Banks. Some NCBs started their purchasing activities from day one, but others did not.
As one leading Irish bond market analyst has noted, the ECB’s earlier Securities Markets Programme launched in May 2010, involving the intermittent purchases of sovereign bonds of several euro-area Member States, was a warm-up for this full scale involvement in sovereign bond markets.
In this programme, 88% of purchases will be made by NCBs purchasing their own country’s debt, with ECB purchases accounting for the balance. The sizes of purchases are in proportion to the ‘capital key’, the amount each member country pays into the ECB for EU membership, which is proportional to the size of the country's population and GDP to the EU. In Ireland’s case that represents 1.65 per cent of the total of planned sovereign bonds, equal to €726 million per month.
In Ireland, market operators explain, the decision on the maturities and amount to be purchased are decided on a weekly basis. These purchases are made on a daily basis through one, two or even three primary dealers from the CB’s panel of primary dealers.
To date the amount of information provided on what has been traded is limited. The ECB has disclosed that in the first week since QE began on March 9 €9.5 billion was purchased and that this figure increased to €26 billion at the end of two weeks.
But beyond having their own monthly targets prescribed by the ECB it appears the NCBs have discretion over the timing of purchases during the course of the month. There is also, it is understood, a degree of flexibility in terms of the exact amounts to be purchased.
Some market participants presume that greater transparency will be provided on the operations of QE in participating states through the provision of more detailed information on changes in individual NCB holdings of sovereign debt, by quantum and maturity, on a quarterly basis, although this has yet to be confirmed.
Irish bond dealers said that, despite some initial concerns about availability of bonds for purchase, QE appears to be working well, with much reduced volatility already evident.
While investors, economists and commentators are still keeping a close eye on how the European project is progressing day-to-day, for some the deed is already done.
The results have been dramatic already. The proportion of sovereign bonds trading with a negative yield has risen sharply, exceeding 30 per cent of total outstandings before the ECB bought a single bond. The euro has also fallen to new lows – a win for the ECB because it represented a major stimulus even before the bond purchases started.
Indeed, it could be argued that QE is actually working too well. Ignazio Visco, Italy's central bank governor and a member of the ECB Governing Council, has expressed concerns about the pace of the euro's fall to 12-year lows on the back of QE.
Speaking at a conference in mid-March he confirmed that the euro had weakened faster than expected since the ECB first hinted at the programme and that there were risks it could overshoot its goal and fuel an excessive rise in asset prices.
"We must try to get inflation close to 2 percent as quickly as possible," Visco said. "We can't keep interest rates at zero forever or for an ultra-prolonged period of time."
It is one of the functions of markets to anticipate change and in the case of European QE that was reflected in the time between its announcement last year and its commencement on March 9th last, almost exactly six years to the day since the UK launched its QE programme. |
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