The interim conclusion on the PSPP around 14 months after the start of the programme is mixed. Contrary to what had been feared, the ECB has so far always managed to meet its purchase target in full. In spite of its technical success, however, the ECB has not yet met all the aims inherent to the programme. Although lending in the eurozone has risen sharply, inflation is still close to or even below 0%. Medium-term inflation expectations, which are mainly influenced by the trend in the crude oil price, are in fact below the level at the beginning of the PSPP. This was one of the main reasons behind the ECB’s decision to increase the programme volume substantially in March of this year.
In contrast, the market-related consequences of PSPP are considerable. Both yields and spreads have fallen sharply in the meantime, while the volatility of bonds has increased. Moreover, the crowding-out effects of ECB demand are clear, and they encourage the misallocation of funds when it comes to financial investments with potentially negative consequences for asset building.
The ECB is likely to stick to its PSPP beyond March 2017, although the monthly purchase volume is likely in our view to depend on the future inflation-rate trend. An intermediary high in the inflation rate at the beginning of next year triggered by the price of crude oil could be fairly short-lived, bearing in mind a still low core rate. The ECB would therefore probably also stick to the PSPP even if inflation were briefly close to the 2% mark, but medium-term inflation prospects still remained relatively low.
Even though bond purchases have not been affected by any shortages so far, the current monthly volume combined with the capital key used cannot be kept up forever. Either an increase in HCPI or an increasingly scarce supply is likely to force the ECB to tackle the issue of its exit from the PSPP. In this respect, the ECB would be well advised to give ample notice of any forthcoming tapering and to proceed in small steps. Economically weaker eurozone states could nevertheless be hit especially hard if risk premiums were then once again measured more on fundamental risks. In an adverse scenario, upheavals could be so severe as to call for fresh ECB measures. The fine-tuning of the ECB’s exit is therefore likely to be of major importance in order to avoid a situation in which several states became permanently dependent on ECB purchases or aid programmes.