Purchases under the programme influence broader financial conditions and, eventually, economic growth and inflation, through two main channels: direct pass-through and portfolio rebalancing.
Purchases under the programme influence broader financial conditions and, eventually, economic growth and inflation, through two main channels: direct pass-through and portfolio rebalancing.
Direct pass-through
When the ECB buys private sector assets, such as asset-backed securities and covered bonds, which are linked to loans that banks grant to households and firms in the real economy, the increased demand for these assets drives up their prices. This encourages banks to make more loans, which they can then use to create and sell more asset-backed securities or covered bonds. The increased supply of loans tends to lower bank lending rates for companies and households, improving broader financing conditions.
Portfolio rebalancing
The Eurosystem has purchased private and public sector assets from eligible counterparties that are financial institutions. The latter may choose to take the funds they receive in exchange for assets sold to the central bank and invest them in other assets.
By increasing demand for assets more broadly, this mechanism of portfolio rebalancing pushes prices up and yields down, even for assets that are not directly targeted by the APP. This results in reduced costs (the effective market interest rate) for companies seeking to obtain financing on the capital markets. At the same time, the compression of yields on securities encourages banks to lend to companies or households. The increased supply of bank lending to the real economy tends to lower the costs of borrowing for households and firms. By lowering funding costs, asset purchases can stimulate investment and consumption. More dynamic demand from both firms and consumers will eventually contribute to returning inflation to below, but close to, 2% over the medium term.