Bundesbank president calls for review of ECB bond purchase policy
21 March 2018 Frankfurt
Image: Shutterstock
Strong EU-wide economic growth means the European Central Bank (ECB) should finally begin unwinding its “very loose monetary policy”, according to the president of the German Federal Bank.
German Federal Bank president Jens Weidmann, who is also chairman of the board of the Bank for International Settlements, described the ECB’s public sector purchase programme, which is currently buying up €80 billion worth of government bonds per month, as “a pure emergency instrument, for example, to avert deflation”.
The current programme will be maintained until the end of March, at which point the monthly target will drop to €60 billion, until the end of December 2017.
“One thing seems to me to be quite clear in view of the current prognosis: we are now a long way from a deflation, ie, an expectation-driven downward spiral in which wages and prices are mutually profound. I have always regarded this fear as exaggerated in the past,” stated Weidmann in a recent speech at the Rotary and Lions Club in Lörrach, Germany.
“The extensive purchase of government bonds blurs the dividing line between monetary policy and fiscal policy. Central banks in the euro area have now become the largest creditors of the member states. I consider this to be problematic in several respects.”
The call for a review will be welcomed by the EU’s beleaguered repo market, which has suffered from increasing severe month- and year-end liquidity cliff edges.
Speaking in response to Weidmann's speech, Roelof van der Struik of PGGM Investments, the second largest pension fund in the Netherlands, said he was less optimistic about the negative (un)intended effects of the combination of regulation, monetary policy and purchasing program (QE).
"The repo market may not be broken, but it is clear that it is not in good health and could breakdown completely during a 'poorly' timed event or moment of market stress."
"There seems to be two main drivers for this: capital rules impeding/de-incentivising banks to provide repo market liquidity; and poor liquidity in the bond market due to QE."
Van der Struik continued: "This translates into key liquidity risk and could result in, for example, pension funds unable to meet cash collateral calls while owning more than enough high-quality liquid assets."
In its latest report into the EU repo market, the International Capital Market Association (ICMA) didn’t mince its words when it described the extreme volatility and dislocation during a year-end liquidity crunch in 2016.
ICMA’s European Repo and Collateral Council has warned: “[The repo market stress] could heighten risks related to banks’ and firms’ ability to meet margin calls, which in turn could have systemic consequences.”
The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are “very much acting in confluence to precipitate the perfect storm”.
Weidmann touched upon a similar theme later in his speech, stating: “One thing should also be clear to us: as the duration of the ultra-loose monetary policy increases, the intended effects diminish, while the undesirable side effects become more and more visible. This includes not only the risk of unsolicited state finances. Low interest rates can also pose a risk to financial stability.”
“Thus, low interest rates and unconventional monetary policy can increase the risk in some financial market segments or in the real estate market.”
Deutsche Bank analyst Jochen Möbert shut down speculation of the programme’s unwinding in a research note last month.
“At the March 2017 meeting, despite the recent increase in the overall inflation, the governing council will hardly be willing to signal a possible 'tapering' of the bond purchases,” explained Möbert.
“At best, it formulates more specific conditions under which a reduction in bond purchases could occur. We expect the announcement of a return or the modification of the bond purchases to continue until June at the earliest. However, the ECB could very well already make a slight shift in its comments in March.”
Representatives from the ECB attempted to ease the concerns of the repo industry over its controversial monetary policy during the Deutsche Börse Global Funding and Financing Summit in January.
ECB board member and conference keynote speaker Yves Mersch acknowledged the negative effects of the central bank's "unconventional monetary policy", but argued that the European repo market, by its very nature, is procyclical and so will continue to suffer for as long as it takes for the overall economy to recover.
"The current market has made unconventional measures necessary on an unprecedented scale. But they are temporary," said Mersch.
German Federal Bank president Jens Weidmann, who is also chairman of the board of the Bank for International Settlements, described the ECB’s public sector purchase programme, which is currently buying up €80 billion worth of government bonds per month, as “a pure emergency instrument, for example, to avert deflation”.
The current programme will be maintained until the end of March, at which point the monthly target will drop to €60 billion, until the end of December 2017.
“One thing seems to me to be quite clear in view of the current prognosis: we are now a long way from a deflation, ie, an expectation-driven downward spiral in which wages and prices are mutually profound. I have always regarded this fear as exaggerated in the past,” stated Weidmann in a recent speech at the Rotary and Lions Club in Lörrach, Germany.
“The extensive purchase of government bonds blurs the dividing line between monetary policy and fiscal policy. Central banks in the euro area have now become the largest creditors of the member states. I consider this to be problematic in several respects.”
The call for a review will be welcomed by the EU’s beleaguered repo market, which has suffered from increasing severe month- and year-end liquidity cliff edges.
Speaking in response to Weidmann's speech, Roelof van der Struik of PGGM Investments, the second largest pension fund in the Netherlands, said he was less optimistic about the negative (un)intended effects of the combination of regulation, monetary policy and purchasing program (QE).
"The repo market may not be broken, but it is clear that it is not in good health and could breakdown completely during a 'poorly' timed event or moment of market stress."
"There seems to be two main drivers for this: capital rules impeding/de-incentivising banks to provide repo market liquidity; and poor liquidity in the bond market due to QE."
Van der Struik continued: "This translates into key liquidity risk and could result in, for example, pension funds unable to meet cash collateral calls while owning more than enough high-quality liquid assets."
In its latest report into the EU repo market, the International Capital Market Association (ICMA) didn’t mince its words when it described the extreme volatility and dislocation during a year-end liquidity crunch in 2016.
ICMA’s European Repo and Collateral Council has warned: “[The repo market stress] could heighten risks related to banks’ and firms’ ability to meet margin calls, which in turn could have systemic consequences.”
The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are “very much acting in confluence to precipitate the perfect storm”.
Weidmann touched upon a similar theme later in his speech, stating: “One thing should also be clear to us: as the duration of the ultra-loose monetary policy increases, the intended effects diminish, while the undesirable side effects become more and more visible. This includes not only the risk of unsolicited state finances. Low interest rates can also pose a risk to financial stability.”
“Thus, low interest rates and unconventional monetary policy can increase the risk in some financial market segments or in the real estate market.”
Deutsche Bank analyst Jochen Möbert shut down speculation of the programme’s unwinding in a research note last month.
“At the March 2017 meeting, despite the recent increase in the overall inflation, the governing council will hardly be willing to signal a possible 'tapering' of the bond purchases,” explained Möbert.
“At best, it formulates more specific conditions under which a reduction in bond purchases could occur. We expect the announcement of a return or the modification of the bond purchases to continue until June at the earliest. However, the ECB could very well already make a slight shift in its comments in March.”
Representatives from the ECB attempted to ease the concerns of the repo industry over its controversial monetary policy during the Deutsche Börse Global Funding and Financing Summit in January.
ECB board member and conference keynote speaker Yves Mersch acknowledged the negative effects of the central bank's "unconventional monetary policy", but argued that the European repo market, by its very nature, is procyclical and so will continue to suffer for as long as it takes for the overall economy to recover.
"The current market has made unconventional measures necessary on an unprecedented scale. But they are temporary," said Mersch.
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