To wean the euro zone off a heavy dose of cheap cash, the European Central Bank will in January cut its monthly asset purchases by half while extending the scheme deep into 2018.
But the “lower for longer” monetary policy stance still leaves investors with many questions unanswered.
For instance, how will the ECB get around a scarcity of eligible government debt and how much will it tinker with other parts of its asset purchase scheme to offset technical constraints in much-larger government bond purchases?
Reinvestment is another key focus, with new data on Monday showing the ECB will have nearly 130 billion euros (£114.5 billion) worth of new cash from maturing bonds to invest over the next year.
This set of graphics highlights what analysts are homing in on as the next phase of ECB QE plays out.
1) BOND SCARCITY
The cut in monthly bond purchases from 60 to 30 billion euros from January takes some pressure off the bond-buying scheme, but the long extension still means the ECB is expected to struggle to source eligible government debt.
Against this backdrop, January data – the first month under the reduced purchase amount – released in February is likely to be scrutinised closely.
“Scarcity is one of the issues we’re looking at and how credible is (ECB chief Mario) Draghi’s statement that they will look to extend the programme if needed or will they have to stop after the 9-month extension?” said Benjamin Schroeder, senior rates strategist at ING. “According to our calculations, extending by 9 months will be stretching to the limits already.”
The scarcity constraints mean ECB asset purchases will continue to deviate from the capital key – where the ECB buys a country’s bonds in line with the size of that economy.
Deviations from the capital key have been in place for some time now but are expected to remain in place so that the central bank avoids hitting a self-imposed rule that prevents it from holding a third of a country’s bonds.
3) WINNERS: CORPORATE, COVERED BONDS
One way for the ECB to get around technical constraints in government bonds is to skew purchases towards the private sector next year, with the share of corporate and covered bonds rising, even if purchase volumes stay the same.
A governing council member recently said that the ECB is looking to keep private sector buys steady.
The central bank has not said how it will divide purchases between public and private sector debt next year. More detail on the composition of buys is likely to be unveiled in December.
4) LOSERS: FINLAND
The likes of Finland, Portugal, Ireland and Slovenia where the ECB has been buying below the capital key due to a scarcity of eligible bonds are likely to be the biggest losers of the ECB’s QE extension, analysts say.
In these countries, the bond issuance schedule is likely to be more closely followed by national central banks, which buy bonds on behalf of the ECB for QE.
“Finland doesn’t have a lot of flexibility and the central bank will have to follow the issuance pattern of the Finnish state even to be close to the target,” said ABN AMRO senior fixed income analyst Kim Liu.
Reinvestments made from maturing bonds are expected to grow in importance next year. The money redeployed back into the bond market is in addition to monthly bond purchases, and should help underpin borrowing costs in the euro area.
Redemptions, disclosed for the first time on Monday, will average 10.8 billion euros a month in the 12 months from November. They will peak in April, hitting 24.3 billion euros.
Source: Reuters (Reporting by Ritvik Carvalho and Dhara Ranasinghe; editing by Mark Heinrich)