ECB stimulus programme helps shave €4bn off Irish interest bill

The European Central Bank's €2.3 trillion monetary stimulus programme, which started 2½ years ago, has helped shave €4 billion off the 2017 interest bill once forecast for the Republic, according to the head of the National Treasury Management Agency (NTMA), Conor O'Kelly.

The comments, made at an Ireland Strategic Investment Fund (ISIF) gathering on Wednesday for 40 of the world's top investors, came a day ahead of a crucial ECB governing council meeting at which the bank is expected to decide to scale back its bond-buying programme, known as quantitative easing (QE), next year.

Since ECB president Mario Draghi started the multi-trillion-euro QE plan in 2015 to boost inflation and growth in the euro area, the region's unemployment has fallen from 11.3 per cent to 9.1 per cent and inflation has surged four-fold to 1.5 per cent.

With inflation still below the ECB’s target rate of close to 2 per cent, economist broadly expect the central bank to continue QE into next year, but reduce the monthly pace of bond-buying to €30 billion from its current €60 billion.

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“Irrespective of what the ECB announces tomorrow, there is no doubt that Ireland has been one of the largest beneficiaries of QE,” Mr Kelly told the gathering in Dublin, which included sovereign wealth funds, government reserve funds and major pension funds from Europe, North and South America, Asia, Australia and New Zealand. They manage about €12 trillion of assets between them.

Ireland’s Government debt ballooned from €50 billion to more than €200 billion during the financial crisis and in 2013, the NTMA was forecasting its interest bill would be €10 billion in 2017.

“QE and our improved credit rating have resulted in a situation where our interest bill will soon be below €6 billion,” Mr O’Kelly said.

Last week, the NTMA redeemed €6.2 billion of bonds, much of which were sold in 2012 and carried an interest rate, or coupon, of 5.9 per cent. Earlier this month, the debt agency raised €4 billion selling a new five-year bond at a negative yield of minus 0.008 per cent, meaning the investors are paying the State to hold their money.

The slump in borrowing costs reflects the impact of QE more than Ireland’s improved financial standing during the period. Still, Ireland’s creditworthiness has improved in the eyes of major ratings agencies as economic growth lowered the Government’s debt relative to gross domestic product.

Credit rating

Last month, Moody’s upgraded its credit rating on the Republic by one level to A2, or five levels below its top-notch Aaa stance. Moody’s was among the main ratings firms to give Ireland a “junk” rating during the financial crisis.

The ECB’s move to slow its quantitative-easing programme comes almost four years after the US Federal Reserve began slowing its similar monetary stimulus programme.

“It’s been very well telegraphed that whatever the ECB would do will be extraordinarily cautious,” said James Nixon, a former economist at the central bank, who now works for Oxford Economics in London. “Policy makers have to step away from the table without the whole house of cards falling down.”

(Additional reporting: Bloomberg.)