Acting at the frontier

The reactivation of the bond purchase program in combination with rising government debt can quickly lead to rising yields.

The ECB will reactivate the bond purchase programme, which can now be regarded as an instrument of monetary policy equivalent to interest rate policy. This time, however, the purchase program was not given an end date, which can quickly lead to problems. Government bonds claim the largest part of the planned purchase volume of 20 billion euros per month for themselves, which, according to estimates, gives the ECB the opportunity to buy government bonds until the end of 2020.

At the same time, an end to ECB purchases is associated with inflation close to the target of almost two percent, which even ECB forecasters do not foresee up to and including 2021. Changes to the issuer limit or the capital key could prolong government bond purchases, but are associated with legal hurdles and correspondingly uncertain, making an expansion of APP purchases to new asset classes likely.
In view of the fact that monetary policy is slowly reaching the edge of its possibilities, Draghi made a clear appeal to governments at the press conference to contain the economic downturn with fiscal growth impulses. If policymakers follow this call, the ECB could reduce its purchases of government bonds sharply, but at the same time the debt-equity ratio of the EMU states could rise in line with the trend. This development should then suddenly lead to significantly higher yields. If one moves in the border area, the possible undesirable side effects could be very large.

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