In announcing the new QE, the ECB has specified that it will continue until interest rates are raised again (instead of indicating a time limit). A move that could even prelude years and years of uninterrupted QE.
The challenge for Lagarde
Certainly for Christine Lagarde, who will succeed Draghi from November 1st, the QE Infinity is going to be the first bone of contention considering the split within the ECB board with Germany and not only that it considered the restart of QE as a move not really required. "It is the fundamental problem of the first months of the Lagarde service," says Richard Barwell, director of macro research at BNP Paribas Asset Management, consulted by the Financial Times.
With regards to quantitative easing, which is almost upon us, we must recognize that the ECB is close to the limit on the purchase of government bonds in some countries. For Germany is Holland, the central bank already holds 31% and 30% respectively of financial assets. In France is Italy, instead, there would still be room to go up to the maximum limit of 33% since Oat and Btp have been purchased so far for 21% of the debt issued. Excluding the Greece which is not part of the bond purchase program as it is classified as "non investment grade", there are other small and medium European countries that would guarantee a wider room for maneuver for ECB purchases, but being little indebted, such as Estonia, have little to offer on the capital market. Hence the need to operate also in the sector of corporate bonds with high creditworthiness, also, however, very limited on the European market.
The bond purchase program was launched by Draghi without a specific expiry date, to the point of being defined "Infinite QE". The concerns of investors are therefore more than justified because the quantitative easing from 20 billion a month that will start in November could end in the course of 2020 due to resources depletion. It would follow that the operation would be more expensive than effective to restore momentum to the economy. However, there are those who believe that such stimuli can still have a real positive impact and that the current phase of easing monetary policies can offer much more effective support than the most skeptical think. Provided there are no other shocks capable of fueling uncertainties, growth appears to be close to an inflection point, in which the more expansive financial conditions will start to take effect, triggering an increase in spending on durable goods. This – analysts say – should keep the recession at bay for a while, potentially for another three years. And it is not true that the ECB would find itself with blunt weapons, since – as Jefferies writes – it would be enough to increase the bond purchase limit to 40% to allow the central bank to lengthen and facilitate quantitative easing operations. Even well beyond 2020.