Blackrock expects the Fed to refrain from tightening monetary policy until geopolitical anxiety recedes. Since the Bank of England is widely expected to cut interest rates to zero on Thursday, “monetary policy divergence is dead”, said Scott Thiel, head of global bonds at Blackrock, commenting on the company’s investment outlook it published today.
Moreover, the BoE will re-introduce QE in August, he added. And he believes the ECB, for its part, will extend QE beyond March 2017, when its current asset purchasing programme expires.
This is perhaps the most interesting, and definitely the most contentious of all prospective central bank actions. After all, the ECB is already struggling to buy enough AAA-rated government bonds under the present conditions of its asset purchasing programme. As it stands now, the central bank is only allowed to own up to 33% of any specific bond, the so-called capital key.
ECB QE – between a rock and a hard place
The asset manager Robeco noted last week that the ECB is unlikely to be able to complete its current QE programme if the underlying conditions are not changed, let alone to extend it.
“So they could move away from the capital key,” said Thiel, admitting this would raise issues around monetary financing. If the ECB becomes too big an owner of the governments bonds of a country, it could be seen as financing this country’s debt (which the ECB in fact already does by owning one single government bond).
“Another option for the ECB would be to loosen its deposit floor, so it could buy bonds that yield below the ECB’s deposit rate,” Thiel added. However, this floor is there for a reason. After all, the ECB would lose money buying such bonds, making it unlikely for the bank to pursue such an option.
Inflation to the rescue?
The ECB may be secretly hoping for inflation to pick up, which could give it an excuse to abandon its increasingly problematic QE programme altogether. The fact that the oil price has risen significantly this year may very well push up inflation towards the ECB’s 2% goal. This looks indeed likely to happen, considering inflation excluding energy is already at 1.2% now, while energy inflation is at -5.4%, according to Eurostat.