ECB prepares for greater asset purchases

The European Central Bank is considering the loosening of rules for its bond purchases as the bank is running out of debt to buy in the aftermath of the Brexit vote. Investors piled into the region’s safest assets and pushed the yields down on sovereign debt too far. Bonds maturing in the next 15 years are yielding less than zero after the EU referendum on June 23, and benchmark securities due in seven years or less are ineligible for purchases under QE.

Under the guidance of the ECB, central banks in the euro area are currently spending 80 billion euros ($89 billion) a month. Present rules stipulate that euro-area central banks can buy bonds sold by governments, agencies and European institutions in the secondary market that yield more than the ECB’s deposit rate, currently at minus 0.4 percent. Also, the current rules require the ECB to allocate purchases based on the size of a country's economy (meaning German debt is favored, relative to others).

Post Brexit vote, the bank is now considering the changing of rules which would allow greater buys of peripheral paper. However, such a move risks controversy because securities issued by highly leveraged governments such as Italy would benefit. 

“It’s been a likely destination for some time and eventually they will have to do this. Brexit may have accelerated the discussion,” said Richard Barwell, senior economist at BNP Paribas Investment Partners in London. 

The euro may remain on the back foot, after reports that the ECB is preparing for the possibility of greater asset purchases. The euro weakened 0.8 percent after the report and hit lows of $1.1024 yesterday.