ECB plans to boost debt purchases from EU stimulus fund

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The European Central Bank plans to raise its purchase limit on EU-issued bonds, which would improve its flexibility in asset purchase programs and strengthen the status of the bloc’s groundbreaking joint debt program launched this year .

Four members of the ECB’s governing council told the Financial Times they would support increasing the share of public sector bond purchases that target debt issued by international bodies such as the EU, compared to the current ceiling of 10%. They plan to discuss the idea at two special board meetings starting in November to decide on support for financial markets from next year. The plan would need the majority support of the 25 ECB board members. The ECB declined to comment.

The hinted change in ECB strategy comes as the European Commission plans to increase the amount of bonds it issues next year as part of its € 800 billion NextGenerationEU stimulus fund – the agreed vehicle in the summer of 2020 to finance the response to the pandemic with debt jointly backed by the Member States.

Brussels aims to issue € 80 billion in bonds for the fund this year and almost double that amount next year, making the EU itself one of the largest bond issuers in Europe. . Any further support from the ECB would likely reduce the costs of financing the EU and help strengthen the status of bloc bonds as a regional benchmark – a role previously dominated by German Bunds.

A trend to buy more European bonds would also help the ECB support financial markets without running into rules that prevent it from holding more than a third of a country’s public debt. Some analysts believe he could hit those limits on German and Dutch debt by 2023.

“The lifting of the limit on supranational purchases would be a way for the ECB to find more room for maneuver on government bond purchases and also to show its support for this important EU program,” said Elga Bartsch, head of macro research at the BlackRock Investment Institute.

The ECB is expected to announce in December that its Pandemic Emergency Purchase Program (PEPP), the € 1.85 billion bond purchase program it launched in response to the Covid-19, will end in March.

The four board members said they expected the central bank to consider ways to retain at least some of the additional flexibility provided with the PEPP, which is exempt from the limit on national government purchases.

One said the ECB was also working on ways to continue buying Greek government debt, which would otherwise be ruled out by its rule prohibiting the purchase of bonds rated below the quality of investment – another restriction lifted under the PEPP.

However, the idea of ​​expanding asset purchases is likely to meet opposition from more conservative members of the ECB’s governing council, including Germany’s Jens Weidmann and Dutchman Klaas Knot.

These so-called hawks are generally uncomfortable with the ECB’s bond buyback, especially outside of times of acute crisis, worrying about governments’ over-reliance on purchases to support debt. high debt levels.

A crucial factor in the debate will be whether the ECB continues to forecast that inflation will fall below its 2 percent target next year and stay there for the next two years. The central bank is expected to update its inflation forecast and release a new forecast for 2024 in December.

Soaring energy prices and supply chain bottlenecks have prompted some ECB policymakers to worry that the bank is underestimating future price growth. Nonetheless, few analysts expect ECB support to the debt market to end abruptly once the PEPP expires. Instead, they widely predict that the central bank will expand its traditional asset purchase program, which has bought € 20 billion in bonds per month alongside PEPP purchases.

“I expect them to continue revising their inflation forecasts until the second half of next year,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “But I still think the asset purchase program will continue until the end of 2023.”

Several board members said the ECB could move from buying a fixed monthly amount of debt as part of the traditional asset purchase program to targeting total aggregate purchases. They said he could also create a new “support fund” in addition to the asset purchase program, to be used only in response to financial market disruptions.

François Villeroy de Galhau, governor of the French central bank and member of the ECB board, said last week that the bank could maintain a capacity to purchase additional assets in the event of an emergency, adding that “the theoretical possibility of their use would mean that we probably wouldn’t have to actually use them ”.


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