Ireland’s debt management agency has taken out “insurance” to guard against the impact of higher interest rates if the European Central Bank’s bond-buying programme comes to an end this year.
Conor O’Kelly, chief executive at the National Treasury Management Agency (NTMA), said that it had been planning for the end of the ECB’s quantitative easing programme since it was introduced.
Ireland’s exposure to rate increases once QE comes to an end has effectively been cut in half through the early repayment of IMF loans and switching of near-term bonds, Mr O’Kelly said.
“There is now quite a lot of talk about QE and it’s unwinding and what will happen, what that will mean for interest rates and for Ireland’s interest costs. You won’t be surprised to hear that we’ve been thinking about the end of QE literally since QE started,” he said.
“I suppose we’ve had a bias to pre-fund and lock in rates. Nobody knows what interest rates are going to do. We said repeatedly that nobody can forecast the future directly but the risks to Ireland are asymmetric and we believe that locking in today’s interests rates while available has been the right strategy.” The ECB programme involves central banks across the eurozone buying debt to increase the cost of bonds. This increases the value of assets held by banks, which creates more money to lend.
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The scheme is designed to enable businesses and consumers to borrow more easily and spend less to repay their debts. This in turn should drive investment and demand, and tackle low inflation.
Last April, the ECB scaled back its QE programme from €80 billion a month to €60 billion. It is expected to come to an end in September.
Through the agency’s work the state’s refinancing requirements had been cut from €60 billion to €30 billion over the next three years, Mr O’Kelly said. “So we’ve essentially taken out insurance against the possibility of rates rising in the future,” he said.
He warned, though, that the strategy was not risk-free. “We’re not in the betting business and we’re not in the gambling business necessarily. We’re trying to assess risk and in this case we think risks are asymmetric. But locking in today’s rates and pre-funding comes at a cost if you’re wrong about the future direction of interest rates.”
Ireland has raised €4 billion through a syndicated ten-year bond this month, continuing a trend of being the first eurozone state to go to the markets each year. Mr O’Kelly said that the pattern was “well-established” and that other European countries were comfortable with Ireland being the first to test the market.
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The agency plans to raise between €14 billion and €18 billion this year. Mr O’Kelly said that it was not under any pressure to meet its target before September, when QE is expected to end, given that it had pre-funded its requirement for this year.