Divyang Shah, Senior IFR Strategist
Unlike the OMT, with its conditional purchases of countries applying for an assistance program, any QE program would involve buying the bonds of all member countries based on economic strength.
Given that we are not that far away from using up conventional policy it does seem natural that an expansion of the ECB’s balance sheet via QE will be increasingly discussed.
However, the ECB’s preferred method of intervention remains non-standard measures via longer dated LTROs and it does not seem likely that this will change.
The trigger for Fed/BoE style QE is still some way off and we would need to see a return of much more severe conditions in the sovereign bond markets to make such a step more palatable. If we get QE it won’t happen pre-emptively. The big focus remains on still undelivered plans on how to improve the transmission mechanism to help SMEs.
The need for action was once again supported by the recent money supply data that showed M3 falling below 3% (to 2.9% y/y in May) and loans to the private sector down 1.1% y/y.
