Why are the expanded asset purchase programmes being conducted?
In 2014 both real and expected inflation in the euro area fell to exceptionally low levels, well below the definition of price stability (i.e. inflation rates below, but close to, 2 per cent). As a result, economic activity gradually lost momentum. The risks of a disanchoring of inflation expectations and the triggering of a deflationary spiral increased.
In accordance with its mandate, in 2014 the Governing Council of the ECB cut its official interest rates several times; bringing the cost of refinancing operations close to zero and lowering the interest rate on bank deposits with the Eurosystem (deposit facility) to a negative level. In June of the same year, the Governing Council announced the launch of targeted longer-term refinancing operations; in September the Asset-backed securities purchase programme (ABSPP) and the Covered bond purchase programme (CBPP3) were introduced.
In January 2015 the outlook for inflation nonetheless deteriorated; therefore, the Governing Council deemed insufficient the stimulus delivered through the monetary policy measures in force. For this reason, it decided to include the purchases of public sector securities (Public Sector Purchase Programme, PSPP) and to increase the volume of its monthly purchases to €60 billion per month (Expanded Asset Purchase Programme, APP). In addition, the Governing Council decided that the APP would continue until September 2016 or beyond if necessary and in any case until the path of inflation in the euro area became consistent with its medium-term aim (see Chapter 4, 'Monetary policy in the euro area', Annual Report for 2015).
While uncertainty about the outlook for the global economy increased, accentuating the downside risks for inflation, in December 2015 and in March 2016 the Governing Council strengthened the APP by (a) extending its term until March 2017 at the earliest, (b) raising the volume of monthly purchases to €80 billion, (c) expanding the range of eligible public sector securities, and (d) including investment-grade bonds issued by non-bank corporations established in the euro area (Corporate sector purchase programme, CSPP) among the eligible assets. The Governing Council also decided that principal payments on the securities purchased under the APP would be reinvested as they matured, for as long as necessary.
To keep expansionary monetary conditions at the right level to ensure an increase in inflation, in December 2016 the Governing Council again extended the duration of the APP until at least the end of 2017. Starting in April 2017, the monthly purchases were scaled back to €60 billion, as in the initial phase of the programme.
In October 2017, the Governing Council announced a recalibration of the APP: the duration of the programme was extended at least until the end of September 2018 and the pace of monthly purchases was readjusted to €30 billion from January 2018. These decisions reflected the assessment that an ample degree of monetary stimulus remained necessary for underlying inflation pressures to be strengthened amid growing confidence in the gradual convergence of inflation rates towards the ECB inflation aim.
In June 2018, the Governing Council announced that, starting in October and subject to incoming data confirming its medium-term inflation outlook, it would reduce the monthly pace of its net asset purchases to €15 billion until the end of the year, and then end net purchases. The Governing Council also reiterated its intention to maintain the policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
In December 2018, the Governing Council ended net purchases under the APP. At the same time, it enhanced its forward guidance on reinvestment. Accordingly, it announced its intention to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP.
In September 2019 the Governing Council decided to relaunch net purchases under the APP at a monthly pace of €20 billion from 1 November. The Governing Council expected purchases to continue for as long as necessary to reinforce the accommodative impact of its low policy rates, and to end shortly before a rise in the key ECB interest rates. The principal payments from maturing securities would continue to be reinvested in full for an extended period of time after the date when the Governing Council began to raise the key ECB interest rates and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
On 12 March 2020, in response to the heightened uncertainty resulting from the spread of the coronavirus (Covid-19), the Governing Council strengthened its existing asset purchase programme (€20 billion each month) with a temporary additional envelope of €120 billion for further net asset purchases until the end of the year, with a strong contribution from the private sector purchase programmes.
With the rapid spread of the epidemic followed by heightened tensions on the financial markets, on 18 March the Governing Council introduced an extraordinary asset purchase programme (Pandemic emergency purchase programme, PEPP), with an overall envelope of €750 billion. The purchases are conducted in a flexible manner over time, across asset classes and among jurisdictions. All public and private financial assets eligible under the APP are also eligible under the PEPP, including, for the first time, securities issued by the Greek Government. In June, in response to the downward revision to the inflation outlook, the Governing Council decided to increase the PEPP envelope by €600 billion to a total of €1,350 billion. In addition, the horizon for net purchases under the PEPP, initially planned until at least the end of 2020, was extended to at least the end of June 2021 and the maturing principal payments from securities purchased would be reinvested until at least the end of 2022. In December 2020, as part of a broad recalibration of the ECB's monetary policy instruments, the PEPP envelope was further increased by €500 billion to a total of €1,850 billion and the horizon of net asset purchases was extended at least until the end of March 2022. The reinvestment of principal payments from maturing securities purchased under the PEPP was prolonged until at least the end of 2023.
The new programme (PEPP) is proportionate to the characteristics of the shock, that has affected the whole of the euro area, and it is tailored to further ease the general monetary policy stance, avoid fragmentation effects and to preserve the full transmission of monetary policy to all euro-area countries. The extension of both net PEPP purchases and reinvestments over a longer horizon counter the marked and prolonged repercussions of the pandemic for the growth and inflation, providing a more lasting monetary stimulus.
What are the transmission channels of the programmes?
As seen in other countries, securities purchases by central banks affect the economy and inflation through various channels. In the euro area, the relative importance of these channels is influenced by the predominant role of the banking system in financing the economy.
The Eurosystem's purchases programmes have direct effects on the yields of eligible public and private sector securities. This determines the first effect on the economy, since the downward shift in the yield curve leads in turn to an improvement in credit supply conditions and stimulates investments.
Investors can use the additional liquidity to rebalance their portfolios towards other financial assets not directly covered under the central bank programmes, thereby transmitting the monetary impulse to a broad range of private-sector financing instruments.
The increased value of households' wealth driven by higher financial and real asset prices can in turn boost consumption.
If monetary conditions in the other economies remain unchanged, the increase in liquidity and the decrease in interest rates can also affect the exchange rate.
The announcement of a significant expansion in the size of the Eurosystem's balance sheet, signalling the Governing Council's determination to ensure price stability with all the instruments at its disposal within its mandate, supports inflation expectations and, more generally, stimulates economic activity by strengthening the confidence of firms and consumers.
What are the effects of the programmes?
The effects of the programme on the financial and foreign exchange markets were seen as early as November 2014, when the President of the ECB announced the start of preparations for implementing this measure, that is: the yields on euro-area government securities fell sharply; there was a further reduction in the cost of bank credit; and the euro depreciated. The effects of the interest rates were reinforced by the strengthening of the APP decided in December in 2015 and in March 2016 (see the section The euro area, Economic Bulletin, 2, 2015 and the box 'The monetary policy measures adopted in March 2016' in Economic Bulletin, 2, 2016).
According to our estimates, the APP made a significant contribution to strengthening GDP growth and obstructed the downward pressures on consumer prices, including by sustaining inflation expectations (see P. Cova and G. Ferrero, Il programma di acquisto di attività finanziarie per fini di politica monetaria dell'Eurosistema, Banca d'Italia, Questioni di economia e finanza, 270, 2015; and the box Gli effetti del programma di acquisto di titoli dell'Eurosistema, Bollettino economico, 1, 2016; G. Bulligan and D. Delle Monache, 'Gli effetti degli annunci di politica monetaria non convenzionale della BCE sui mercati finanziari', Questioni di economia e finanza, 424, 2018). The simulations of the quarterly model of the Italian economy show that the overall effect of all the monetary policy measures adopted since 2014 have led to higher GDP growth of about one percentage point each year in the period 2015-16 and to an increase in inflation of more than half a percentage point (see the box Le determinanti della ripresa in Chapter 5, Annual Report for 2015, 2016).
The launch of the PEPP, adopted in March 2020, led to a sharp reduction in tensions on the financial markets and countered the risks threatening the smooth transmission of monetary policy to all euro-area jurisdictions.' Following its announcement, yields on long-term government bonds fell significantly in all the euro-area economies. The spreads with respect to German ten-year Bund yields have fallen widely.
What are the main characteristics of the programmes?
The APP consists of purchases of:
- Covered bank bonds (Covered Bond Purchase Programme, CBPP3);
- Asset-backed securities (Asset-backed securities purchase programme, ABSPP);
- Securities issued by: the 'central governments' of euro-area member states, a number of issuers active in the public sector in the area's countries, and European institutions (Public sector purchase programme, PSPP);
- Investment-grade bonds and, since March 2020, commercial paper issued by firms (Corporate sector purchase programme, CSPP).
The securities purchased under the APP must be eligible as collateral in Eurosystem refinancing operations.1 The purchases are conducted by the ECB and the NCBs with eligible counterparties, including counterparties they trade with, in the context of their own investment activities in euro-denominated securities.
Launched in October 2014, the CBPP3 consists of purchases of euro-denominated covered bank bonds on the primary and secondary markets, which have a minimum first best rating of at least BBB- or equivalent and an issue share limit of 70 per cent for each international securities identification number (ISIN).
Under the ABSPP, launched in November 2014, purchases are made on the primary and secondary markets of senior and mezzanine tranches of euro-denominated ABS with a second best rating of at least BBB- or equivalent and an issue share limit of 70 per cent for each international securities identification number (ISIN).
Starting in March 2015 the PSPP envisages purchases of public sector bonds exclusively on the secondary market with a residual maturity of between 1 and 30 years. In order not to distort the market price formation process and to avoid hampering the possible application of collective action clauses (CACs), the purchases must comply with the threshold of 33 per cent of each issue (50 per cent in case of securities issued by European institutions) and the threshold of 33 per cent of the debt issued by each country in the euro area or by issuers in the public sector sphere of the euro-area countries (50 per cent in case of securities issued by European institutions). For certain securities that have a different collective action clause to the one contemplated in the European model, the applicable threshold can be verified on a case by case basis (33 or 25 per cent of the value of each issue). Compliance with the thresholds is assessed taking into account the total stocks held by the Eurosystem, including those held for non-monetary policy purposes. The list of international and supranational institutions and of the other non-sovereign issuers in the euro area whose securities can be purchased under the PSPP is published on the ECB's website.
Under the CSPP, since June 2016 euro-denominated bonds of non-bank issuers incorporated in one of the countries of the euro area are purchased on the primary and secondary markets. Eligible securities have a residual maturity of between 6 months and 30 years, although bonds issued by public sector corporations are excluded from the purchases on the primary market. Securities issued by credit institutions and by entities with a parent company which belongs to a banking group are not eligible. The issuer cannot be an asset management vehicle pursuant to the Bank Recovery and Resolution Directive. Beginning in March 2020, commercial paper can also be purchased if its credit quality is sufficient and it has been issued by a corporation.
The Pandemic emergency purchase programme (PEPP), announced and launched in March 2020, is a temporary measure to counter the serious risks to monetary policy transmission and the economic outlook for the euro area as a result of the spread of Covid-19.'
The PEPP will purchase public and private sector securities with an overall envelope of €1,850 billion. Purchases will be conducted at least until the end of March 2022 and, in any case, for the duration of the Covid-19 emergency. The purchases conducted in a flexible manner over time, across asset classes and among jurisdictions, involve all the public sector and private financial assets under the APP, including, for the first time, securities issued by the Greek Government. The residual maturity at the time of purchase for public sector securities ranges from a minimum of 70 days to a maximum of 30 years and 364 days. For private sector securities that are eligible under the CSPP, the residual maturity at the time of purchase ranges from a minimum of 28 days to a maximum of 30 years and 364 days, whereas for private sector securities eligible under the ABSPP and the CBPP3, there are no restrictions to maturities.
Each week the ECB publishes the aggregate value at Eurosystem level of the purchases made under the different programmes. It also publishes information on the amount and average residual maturity of the public sector securities purchased under the PSPP (monthly) and the PEPP (bi-monthy), disaggregated by country of issue. Since January 2018, the ECB has also published the expected monthly redemption amounts over a rolling 12-month horizon:
In order to maintain liquidity and ensure the proper functioning of the markets, the ECB and the national central banks, working on a decentralized basis, make the bonds purchased available (with the exception of ABS) through securities lending operations.
For further information please consult the ECB's website:
How are the purchases distributed among the various securities?
Purchases of covered bank bonds are made by the ECB and the NCBs; as of 1 April 2017, ABS purchases have been carried out by some NCBs, including the Bank of Italy, acting on behalf of the Eurosystem. Ten per cent of total purchases under the PSPP are executed by the ECB and the remainder by the NCBs on the basis of the capital key principle for euro-area government securities and those issued by regional and local governments and recognized agencies (see the Table). This principle does not imply compliance with the strict limits regarding the division of the monthly net purchases, as some flexibility supports the implementation of the programme. Moreover, there may be temporary deviations during the reinvestment phase, in function of the maturities of the portfolio securities and the possibility to distribute these reinvestments over time (for the technical details on the reinvestment procedures, see the ECB's website).
The guiding principle of the capital key also applies to purchases of public sector securities, with a margin of flexibility to allow for fluctuations in the distribution of the flow of purchases over time, across asset classes and among jurisdictions.
The interventions in non-bank bond markets are made by six NCBs (in addition to the Bank of Italy, the NCBs of Belgium, Finland, France, Germany and Spain). In the programmes that envisage purchases by the whole of the Eurosystem, the principle of specialization applies: each NCB is the primary buyer on its home market, while the ECB buys securities from all jurisdictions.
Risks on securities purchased under the programmes are shared among the NCBs based on their capital key, with the exception of those linked to government securities (or bonds issued by regional and local governments and recognized agencies) purchased by the NCBs under the PSPP and the PEPP, which are borne by the respective national central banks.
What are the effects on the Bank of Italy's balance sheet?
The programmes have increased the size of the Bank of Italy's balance sheet in that the securities purchases on the asset side are matched by a corresponding increase in the monetary base on the liability side.
The securities purchased are recorded at amortized cost subject to impairment. The adoption of this valuation principle implies that the balance sheet value of the portfolio will not be affected by any fluctuations in market prices after the purchases. In order to guarantee the required transparency, the market value is published in the Notes to the Annual Accounts of the Bank of Italy.
The expansion of the Bank's balance sheet has increased its profitability, but also the overall risk exposure. It is constantly monitored by the Bank of Italy, especially for the purposes of drawing up the annual accounts when the necessary provisions are made to adapt the Bank's financial buffers to the size and riskiness of the balance sheet, also taking into account the risks shared with other NCBs, with the aim of preserving the Bank's capital adequacy and its financial independence.