ΕCB to discuss quantitative tightening

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The European Central Bank Governing Council will begin discussions on shrinking its balance sheet during Wednesday’s non-monetary policy meeting in Limassol.

The Central Bank of Cyprus announced that ECB President Christine Lagarde and governor Constantinos Herodotou would have a “free and open discussion” with 100 university students in Nicosia on Tuesday evening.

As the ECB has embarked on the journey of monetary policy normalisation and has proceeded with two rate hikes to tame the Eurozone’s soaring inflation, council members have brought the issue of the ECB balance sheet to the fore.

Since the beginning of asset purchases in 2014 via the APP programme and an emergency pandemic purchases programme (PEEP), the ECB has amassed trillions of euros on its balance sheet, mainly sovereign bonds.

According to Bloomberg, Austria’s Robert Holzmann said shrinking the trillions of euros of bonds accumulated by the ECB during recent crises is part of the normalisation process, and so-called quantitative tightening will be discussed at a non-monetary-policy meeting in Cyprus.

Discussions on shrinking the ECB balance sheet will begin in the non-monetary policy meeting scheduled to be held in Limassol; the Financial Times said that “any announcement on the issue is unlikely until later in the year, with the first opportunity coming at the October 27 monetary policy meeting in Frankfurt.”

Citing two people involved in the talks, the FT said that ECB was likely to decide by the end of the year to reduce the amount of maturing bonds it replaces in a portfolio of mostly government securities that it only stopped adding to in July.

“The proposed shift, which causes a central bank’s balance sheet to shrink and is known as quantitative tightening, may come into force in the first quarter of 2023, they said,” the FT added.

Lagarde said that although the ECB is examining all instruments, including the reinvestment policies, “now is not the time, and we would regard it as premature.”

“We are using the policy rate.

“It will happen, but on the basis of data, on the basis of our analysis meeting-by-meeting, and once we have determined that these policies of reinvestment, or discontinuing reinvestment, are going to be necessary and appropriate to help us return to the 2% medium-term target”.

Total bond holdings in the ECB balance sheet acquired by the two programmes amounted to almost €5 trillion.

Bond purchases are compressing sovereign bond yields assisting states in issuing cheaper debt.

Although net purchases were terminated in July under APP and in March under the PEPP, the ECB said it would continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period past the date when it started raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

Concerning the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.

“In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance,” the ECB said.