Eurozone Quantitative Easing ‘Would have Less Impact than Earlier Programmes’

Although a programme of quantitative easing (QE) by the European Central Bank (ECB) would be mildly positive for euro area sovereigns, corporates, utilities and infrastructure and structured finance sectors, its impact would likely be more limited than that of similar programmes conducted in the US and the UK, says Moody’s Investors Service.

In its report, entitled
‘ECB QE Would Be Mildly Credit Positive for Euro Area Issuers’
, the credit ratings agency (CRA) highlights the fact that QE in the euro area would have marginally positive consequences for asset prices, growth and inflation.

As a high profile shift in monetary policy, QE could have a significant signalling effect, raising inflation expectations and encouraging higher spending by businesses and households.

However, Moody’s believes its impact would be more limited than that of similar programmes in the US and the UK. The ECB has already implemented various measures aimed at enhancing bank lending; the additional impact that QE would have is uncertain.

In addition, financial markets are functioning much more smoothly than they were in 2009 when the US Federal Reserve and the Bank of England (BoE) started their QE programmes. The greatest impact on asset prices would likely be felt in the asset-backed security (ABS) market.

“QE is most powerful where yields are highest and furthest away from fair values. There does not seem to be many such markets in the euro area at the moment,” said Marie Diron, a senior vice president in Moody’s macro financial analysis unit.

Nonetheless, any impact on growth and inflation, however limited, would support euro area sovereigns’ efforts to lower budget deficits and real debt burdens. Higher growth, a weaker euro and improved access to finance would also benefit corporates and their customers: while QE could also have some negative implications for some industries, its overall effect on the corporate sector would be mildly positive.

Similarly, any improvement in the general economic environment as a consequence of QE would be credit positive for outstanding structured finance transactions, improving asset quality and raising the price of the assets in the securitised pools.

In contrast, says Moody’s, the impact of QE on banks would be mixed. Overall it would be marginally positive, with asset quality benefitting from higher growth and a sustained low rate environment. However, banks would also face lower net interest margins and could be incentivised to invest in riskier assets.

QE would be broadly credit negative for insurers because the lower returns on their assets and a riskier investment stance, prompted by a decline in yields, would offset the more positive macroeconomic outlook.

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