The European Central Bank has bought enough bonds so that it could retreat from further purchases without risking an unwarranted rise in longer-dated bond yields, ECB executive board member Benoit Coeure said.
Once the bank’s purchases hit a critical threshold, it needs fewer additional buys to contain yields at the longer end of the curve and this is clearly evident in the case of bonds of Germany, the biggest economy in the euro zone, Coeure said at a conference in New York.
While Coeure did not directly make the case for ending the ECB’s 2.55 trillion asset buys, the comments will likely strengthen market expectations for the bank to finally shut its quantitative easing scheme by the end of this year, three and a half years after its launch.
“With the current share of the Bund free float constituting only a small fraction of the total outstanding, we can be confident that we have passed this threshold in the euro area,” Coeure, who oversees the ECB’s market operations, said.
“In the future, the Eurosystem can retreat as buyer in the market without risking an unwarranted decompression of the term premium,” Coeure added, referring to the premium investors pay to hold longer dated papers instead of shorter maturities.
But once the end of the bond purchases loom, uncertainty about interest rates starts to increase – a risk that could create volatility in yields and which must be contained, Coeure argued.
“Once their policy objectives come closer to being achieved, central banks can safeguard low bond yields, if judged necessary, only to the extent they provide effective guidance on the future path of short-term interest rates,” he said.
The ECB’s bond buys are now running at 30 billion euros per month, well below a peak rate of 80 billion euros.
They are set to end in September but policymakers have said that buys will likely not end in a single step and were likely to be gradually wound down, or tapered, over a period of several months.
The bank has also said that interest rates will only rise well after the purchases end and market put the first interest rate hike towards the middle of 2019.
Source: Reuters (Reporting by Balazs Koranyi; Editing by Matthew Mpoke Bigg and Alison Williams)