The European Central bank held it September meeting and announced no change to its official interest rate or to its €80 billion per month bond purchase programme. Markets were disappointed that there were no further additions to the ECB’s stimulus and reacted by sending yields higher. The German 10 year yield rose nearly 6bps to -0.05, the equivalent US yield rose 6bps to 1.60% and when the Australian bond market opened, 10 year bond yields rose sharply.
At the press conference following the announcement, ECB chief Mario Draghi said the ECB’s negative interest rate policy “is really working very well. It’s never worked better.” He also restated the scheduled for the monthly asset purchases to run to the end of March 2017, “or until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.”
This means there is no evidence of the ECB looking to expand programme, which means the ECB may face the same issue as the Bank of Japan; a lack of assets to buy. There is a difference, however. In Japan’s case, the BoJ has bought so many bonds and stocks (via ETFs) a de facto nationalisation has occurred, albeit at market value. In Europe’s case, the asset purchase program rules limit purchases and, according to UBS, the Eurosystem may hit holding limits of German debt within the next 6 months.
ANZ Research said, “Despite downgrading its inflation and growth forecasts modestly, and certainly still maintaining an easing bias, it was the fact that the ECB supposedly didn’t consider an extension of its QE program at this meeting that seems to have been what disappointed the market.” Westpac’s Elliot Clarke said, “Market participants are becoming increasingly concerned over the ability of the ECB to continue its asset purchases past early 2017.”