ECB acts to ensure glitch-free journey to smooth QE end

Bloomberg

The European Central Bank is making sure its bond-buying program doesn’t run into any problems in Germany in the final stretch.
Six months before purchases are currently set to expire, the ECB added seven German regional development agencies to the list of institutions whose debt is eligible for quantitative easing. The expansion was done at the request of the Bundesbank, which under rules linking QE to the size of national economies is responsible for the largest share of the euro area’s purchases.
The decision suggests that while ECB President Mario Draghi repeatedly says QE isn’t running into shortages, there may well be risks unless tweaks are made. Monetary officials are scouring the market for 30 billion euros ($37 billion) a month under the program — a core plank of stimulus measures to revive inflation — and holdings will top more than 2.5 trillion euros by September. With price pressures still weak, the scheme might yet be extended again.
“The ECB can always play with numbers and parameters to make QE last a little longer,” said Frederik Ducrozet, an economist at Pictet Wealth Management in Geneva. “What they did, can at least at the margin help them to postpone the binding constraints — the day when they see those constraints kicking in.”
One of those limitations is a self-imposed commitment to hold less than 33 percent of a single country’s outstanding debt. That’s primarily aimed at shielding the ECB from accusations it’s financing governments, but also at maintaining a functioning market for QE-eligible securities.
Germany’s economic size, the government’s commitment to not issue new debt and the role of its bond-market as a haven for banks seeking quality assets makes the country a particular concern. ECB Executive Board member Benoit Coeure said last month that less than 10 percent of the outstanding stock of German bunds might currently be in the hands of private investors.

SCARCITY CONCERNS
Rising bond prices in the past two months have pushed yields on 5-year German debt back below zero. The 10-year has dropped to around 0.5 percent from 0.8 percent over the same period.
Another sign that the Bundesbank is operating in a tight market comes from the failure of so-called reverse auctions. Since March, the German central bank invited sellers to offer bonds with the intent of buying as much as 450 billion euros, but only 8 billion-euros worth of assets eventually traded hands as price expectations diverged.
The additional wiggle room the Bundesbank gained with the expansion of the pool of assets will probably be small, said Pictet’s Ducrozet.
“It’s not a game changer — it’s not enough for them to extend QE in any meaningful way into 2019,” he said. “But it could help at the margins to smooth the collateral damage, and the market impact from the end of the program when they will come closer to those constraints.”

Labour boom adds to slack
Bloomberg

Mario Draghi’s success in reviving the euro-area economy could, ironically, delay the European Central Bank’s exit from extraordinary stimulus.
The currency bloc’s broadest economic expansion in its history is drawing workers back to the job market and spurring companies to invest to replace aging equipment. Governments — with varying degrees of reluctance — have even pushed some through reforms aimed at improving productivity.
The result is the 19-nation economy should now be able to grow at a faster rate than before without spurring inflation. Bloomberg Economics reckons the pace of so-called potential growth rose to 1.9 percent last year compared with 1.2 percent in 2016.