Buy EURs: Understanding the European Central Bank’s Asset Purchase Programs

The European Central Bank (ECB) uses asset purchase programs to influence monetary policy and ensure price stability. These programs involve buying securities, primarily bonds, to inject liquidity into the financial system and steer inflation towards its 2% medium-term target. Understanding these programs can be crucial for anyone looking to Buy Eurs as they significantly impact the currency’s value.

The Evolution of ECB’s Asset Purchase Programs

Initially introduced in mid-2014 to address the euro area’s economic challenges, the Asset Purchase Program (APP) has undergone several recalibrations. The APP comprises several sub-programs targeting different asset classes:

• Corporate Sector Purchase Programme (CSPP): Focuses on buying corporate bonds.
• Public Sector Purchase Programme (PSPP): Concentrates on purchasing government bonds.
• Asset-Backed Securities Purchase Programme (ABSPP): Involves buying asset-backed securities.
• Third Covered Bond Purchase Programme (CBPP3): Deals with covered bonds.

Source: ECB. The average monthly APP targets were first set by the ECB’s Governing Council at the start of the PSPP in March 2015. The additional envelope of €120 billion decided by the Governing Council on 12 March 2020 has been linearised for illustration in this chart, while it will be implemented in full according to the established principles with additional flexibility.

The ECB’s monetary policy strategy review in July 2021 reaffirmed the importance of policy interest rates as the primary instrument. However, asset purchase programs remain a key tool, especially when interest rates are at their effective lower bound.

Net Purchases and Reinvestments

The ECB adjusts the pace of its net purchases and reinvestments based on economic conditions. From March 2015 to June 2022, the monthly net purchases fluctuated between €15 billion and €80 billion, including a temporary increase to €120 billion during the pandemic. As of July 2023, the ECB discontinued reinvestments under the APP, meaning the portfolio will gradually decrease as assets mature. This shift signals a move towards tighter monetary policy.

Redemptions and Climate Change Considerations

The ECB aims to reinvest principal payments from maturing securities in a market-neutral manner. However, since October 2022, corporate bond reinvestments have been tilted towards issuers with better climate performance, reflecting the ECB’s commitment to sustainability. This policy is expected to continue and intensify, further influencing market dynamics.

Terminated Programs: SMP and CBPP1 & CBPP2

The ECB has also employed other purchase programs in the past, including the Securities Markets Programme (SMP) and two previous covered bond purchase programs (CBPP1 and CBPP2). These programs were terminated but provide valuable context for understanding the ECB’s overall approach to market intervention.

Impact on EUR and Investment Decisions

The ECB’s asset purchase programs exert significant influence on financial markets and the value of the Euro. Decisions to buy or sell EURs should consider the current state of these programs. Reduced purchases and the discontinuation of reinvestments can signal a strengthening EUR, while increased purchases can indicate the opposite. Investors should monitor ECB announcements and publications for insights into future policy directions.

Eurosystem holdings under the asset purchase programme

Understanding the complexity of these programs and their potential impact is vital for making informed decisions in the foreign exchange market.