The Corporate Sector Purchase Programme (CSPP): Challenges and future prospects

15-09-2017

Large-scale asset purchase programmes are a form of monetary policy in which market interest rates are reduced by different amounts at different maturities – and lower them at the long rates that affect investment and consumption decisions. They are designed to stimulate spending by increasing liquidity, raising asset prices, creating wealth effects, lowering borrowing costs and increasing investment. Corporate bond purchases (CSPP) are complementary to, not an alternative to standard QE policies. They increase the impact of QE policies; widen the pool of (potentially) high quality assets that can be used (itself a risk reducing measure that reduces the pressure on reserves); and make it easier to steer economic performance by reducing risk premia, that is sectoral or regional interest spreads. That not only reduces average borrowing costs; it delivers better economic performance where it matters most. More important perhaps, this technique allows us to bypass the risk aversion and regulatory constraints in the banking system that have limited the transmission of greater liquidity into loans and new investment spending despite lower borrowing costs. The risks to the ECB’s balance sheet appear to be small, and likely to be less than using bonds from highly indebted governments.

Large-scale asset purchase programmes are a form of monetary policy in which market interest rates are reduced by different amounts at different maturities – and lower them at the long rates that affect investment and consumption decisions. They are designed to stimulate spending by increasing liquidity, raising asset prices, creating wealth effects, lowering borrowing costs and increasing investment. Corporate bond purchases (CSPP) are complementary to, not an alternative to standard QE policies. They increase the impact of QE policies; widen the pool of (potentially) high quality assets that can be used (itself a risk reducing measure that reduces the pressure on reserves); and make it easier to steer economic performance by reducing risk premia, that is sectoral or regional interest spreads. That not only reduces average borrowing costs; it delivers better economic performance where it matters most. More important perhaps, this technique allows us to bypass the risk aversion and regulatory constraints in the banking system that have limited the transmission of greater liquidity into loans and new investment spending despite lower borrowing costs. The risks to the ECB’s balance sheet appear to be small, and likely to be less than using bonds from highly indebted governments.