ECB Should Change Rules That Limit Asset Purchases, Bruegel Saysby
Quantitative easing likely to face constraints through 2017
Corporate bonds, different allocation system could be options
The European Central Bank may need to buy different kinds of bonds to be able to keep up the pace of stimulus through next year, economic policy research group Bruegel said.
Limits designed to prevent the financing of governments will hamper the program “especially if the ECB decides to increase its monthly purchases,” Gregory Claeys and Alvaro Leandro, researchers at the Brussels-based organization, wrote in a paper released Monday. “We recommend that the ECB further alter the program guidelines.”
The central bank began quantitative easing, a policy involving large-scale asset purchases, in March 2015 to bolster economic growth and lift inflation in the 19-member euro area. The program is now 60 billion euros a month until at least March 2017, a number and time-frame that could be expanded as soon as next month.
Restrictions mean national central banks can only buy 33 percent of each issue of a sovereign’s debt, purchase amounts are determined by an ECB weighting known as the capital key, and assets are only eligible if their yield is higher than the deposit facility rate, which currently stands at minus 0.3 percent.
The ECB has already expanded the number of eligible securities available, but if it wants to do more, it could consider allowing the purchase of corporate bonds and senior, highly-rated uncovered bank bonds, Claeys and Leandro said. It could also move away from the current allocation system to one based on the size of countries’ outstanding debts. Otherwise, Germany will hit its buying limit first.
“Distributing the purchases across countries according to their outstanding debt instead of distributing them according to the ECB capital keys would lead to limits being reached in every country at roughly the same time,” the paper states.
The researchers also say the benefits of the easing program outweigh potential negative implications for financial stability and inequality.
While central banks should know the side effects of their policies, “issues of financial stability and inequality are mainly the result of deep structural changes, and therefore other policies remain essential to deal with them,” they write.