The Expanded Asset Purchase Programme (Quantitative Easing)
When the ECB’s Governing Council took the decision, on 22 January 2015, to launch the Expanded Asset Purchase Programme (EAPP), it reached the unanimous conclusion that the purchases made under this programme constitute a monetary policy instrument. The asset purchase programme seeks to avert the risk of a prolonged period of low inflation and the stagnation that it usually brings, which is in line with the key objective of price stability laid down by the Treaty on the Functioning of the European Union.
Generally speaking, the asset purchase programme works through the following three channels. First of all, it has a direct effect on the price of the assets purchased and triggers, ceteris paribus, a fall in interest rates on sovereign debt. Secondly, it leads to a portfolio shift, as the former holders of the assets bought up by the ECB look for alternative investment options. This pushes the prices of other assets up, while the interest rate that they attract comes down too, thus leading to a wider relaxation of borrowing conditions. An important factor here is that the banks are encouraged to start lending again. Thirdly, the programme plays a key signalling role and helps anchor inflation anticipations.
The purchases are booked on the assets side of the Bank’s balance sheet, in item 7.1 entitled ‘securities held for monetary policy purposes’. Any interest earned on these securities is included in the Bank’s overall result (net interest income), to be distributed pursuant to Article 32 of the Organic Law.
Among the likely consequences of the EAPP for the Bank in the medium term are higher risks, especially in an environment of rising interest rates, which in turn put pressure on the financial results. This is why the option of an additional reserve set-aside has been taken up for the year 2014. The allocation of 50 % of the profits (instead of 25 %) to the available reserve brings the Bank’s financial buffers into balance with the quantified risks, without taking into account the more volatile annual result. The reserve allocation decision will be reviewed each year.