EUR 129.84bn of today's targeted longer-term refinancing operation, which is tied to lending, was taken up, compared with EUR 82.6bn in the first four-year tender. It remains to be seen what the net impact on the ECB's balance sheet will be. We believe that the ECB will come under increasing pressure to announce further measures in order to meet its "intention" of expanding its balance sheet to EUR 3 trillion.
Hence, the probability that the ECB will launch a large-scale public bond purchasing program is growing. In our view, there are too many factors arguing against such a move: First, steering the balance sheet should not be a monetary policy target in itself – especially since the ECB's balance sheet hinges to a large degree on the demand for liquidity among banks. Second, there are at present no deflationary trends that could warrant this sort of bond program. Without the necessary adjustment processes in the countries on Europe's periphery and the downward slide in oil prices – a welcome development from an economic perspective – the current rate of inflation would be almost one percentage point higher than it is at present. Third, yields are already low and large-scale government bond purchases would only spur the hunt for returns and fuel the risk appetite on the financial markets further, while at the same time further eroding the incentive to save for retirement. The economic impact of the asset purchases would occur largely via the exchange rate channel, entailing the risk of an excessive slide in the euro.
In terms of both the measures already agreed and any further quantitative easing, it is important to bear in mind that the negative deposit rate is counterproductive, because it makes it unattractive for banks to preserve liquidity. In this respect, a technical hike in key rates would facilitate the expansion of the balance sheet, although this should not be misunderstood as a monetary policy signal. All in all, it is to be hoped that the economic recovery in the eurozone gathers steam quickly enough – pushed by the oil price as well as exchange rate developments – in order to prompt the ECB to drop its “intention” to ratchet up its balance sheet to crisis level.