04.10.2022
According to reports, the meeting of the European Central Bank (ECB) Board of Governors, due to be held on Wednesday in Limassol, will include a discussion of the reduction of the ECB’s balance sheet.
As the ECB has already launched a cycle of raising its key rate in an attempt to tame record high inflation, central banks are already raising the issue of reducing the bank’s balance sheet, which is called quantitative tightening.
The ECB has purchased trillions of bonds, mostly eurozone member states, under two key programmes: the Asset Purchase Program (APP) and the Emergency Pandemic Purchase Program (PEPP).
According to Bloomberg media agency, the governor of the Austrian central bank and a member of the ECB’s governing council, Robert Holzmann, said that the issue of monetary tightening will be raised at a meeting of the governing council in Cyprus.
Discussions on the ECB’s reduced balance sheet will begin at a board meeting in Cyprus, with official statements on the matter expected towards the end of the year.
In a report published on September 9, a British newspaper, citing two people who took part in the discussions, said that the ECB is likely to decide at the end of the year to reduce the amount of reinvestment of redemption bonds, which mainly concern government bonds . while the net asset purchase ended in July .
The proposed change, which would shrink the bank’s balance sheet and known as quantitative tightening, the opposite of quantitative easing, could go into effect in the first quarter of 2023, two officials told the paper.
According to official data from the ECB, the balance of assets that the ECB held on its balance sheet through PEPP as of September 23 amounted to €1.7 trillion.
The total balance of the APP program at the end of August amounted to 3.26 trillion euros, of which 2.6 trillion euros are in public sector assets (PSPP).
In addition, according to the data, the total value of Cypriot bonds held (until the end of August) on the balance sheet of the ECB under two programs (PEPP and PSPP) amounted to 6.78 billion euros.
Government bond markets keep yields, and therefore the cost, of borrowing low for member states of the European Union.
However, when answering questions on the matter during a press conference in Frankfurt on 8 September, ECB President Christine Lagarde said that now is “not the time” to discuss reducing the ECB’s balance sheet and that the issue is “premature” as the ECB’s main tool for fighting inflation are interest rates.
“We use interest rates. This will be done, but based on evidence, based on analysis and every board meeting, and if we decide that a reinvestment or no-reinvestment policy is necessary and appropriate to help us get back on track with the medium-term goal . with inflation of 2%,” Lagarde said.
Net purchases of bonds under the APP and PEPP programs ended in July and March of the same year, respectively.
However, the board has decided that bonds purchased through PEPP will be reinvested “until at least the end of 2024”, while under the APP, bond buybacks will be reinvested “for a long period of time after the date it started raising the ECB’s key interest rates and, in any case, for as long as deemed necessary to maintain ample liquidity conditions and appropriate direction of monetary policy.”
With regard to targeted long-term refinancing operations (TLTRO), an instrument that is used to provide liquidity to banks, the ECB’s Governing Council noted in its latest decision that it will continue to monitor bank financing conditions and ensure that the termination of operations is in line with the third TLTRO series does not affect the smooth transmission of monetary policy. The Board will also regularly assess how earmarked financing operations influence the direction of monetary policy.
However, analysts highlight the lack of collateral, a problem raised by the ECB’s decision to buy bonds, which are also used as collateral to boost liquidity.
Finally, in addition to the Governing Council meeting in Limassol on Wednesday, an informal meeting is also expected on Thursday.
