04/10/2022 11:26
The European Central Bank Governing Council is set to begin discussions on shrinking its balance sheet in its non-monetary policy meeting to be held in the coastal city of Limassol, in Cyprus on Wednesday, hosted by the Governor of the Central Bank of Cyprus Constantinos Herodotou.
In the meantime, the Central Bank of Cyprus announced that ECB President Christine Lagarde and Herodotou will have on Tuesday evening a "free and open discussion" with about 100 university students in Nicosia, on Tuesday.
As the ECB has embanked on the journey of monetary policy normalisation and has so far proceeded with two rate hikes so far in a bid to tame Eurozone soaring inflation, governing 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 as well an emergency pandemic purchases programme (PEEP) the ECB has amassed trillions of euros on its balance sheet, in 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 normalization process, and that so-called quantitative tightening will be discussed at a non-monetary-policy meeting in Cyprus.
Discussions on the shrinking of the ECB balance sheet will begin in the non-monetary policy meeting scheduled to be held in Limassol Wednesday, the Financial Times have said, noting however 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,” FT added.
Responding to questions on the issue during following the monetary policy decisions on 8 September. Lagarde said although the ECB is examining all instruments, including the reinvestment policies “but 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,” she stressed.
Total bond holdings in ECB balance sheet acquired by the two programmes amounted to almost €5 trillion. Bond purchased are compressing sovereign bond yields assisting states to issue cheaper debt.
Although net purchase have been terminated in July under APP and in March under the PEPP, the ECB said it will to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time 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. As concerns 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 added.