ECB to announce QT program details at December meeting

Christine Lagarde, President of the European Central Bank speaks at the event. The central bank will meet in mid-December for further monetary policy decisions.

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The European Central Bank is likely to answer permanent questions in the coming weeks that could have a major impact on financial markets.

At its December meeting, the ECB will discuss and reveal more details about how it will remove 8.8 trillion euros ($9.21 trillion) from its balance sheet – in a process known as quantitative tightening.

For years, the central bank has been loose in its monetary policy, buying sovereign debt across Europe to maintain borrowing costs for governments and, later, for individuals. to help promote growth.

However, with high inflation and record highs under its belt, the market is now waiting for details on how and when the ECB will sell these bonds.

“The biggest question in December is what they’re going to do about QT,” Marchel Alexandrovich, European Economist at Saltmarsh Economics, told CNBC by phone.

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Back in October, the President of the ECB Christine Lagarde said that the discussion on the sale of bonds will consider three main points: the price perspective, the current measures taken, and the delivery stop – given that it takes time for any financial decision to influence it. economy.

Speaking Monday, Lagarde confirmed the timeline. He told the European Parliament, “In December we will also present the main principles for reducing bond holdings in our asset purchase portfolio.”

‘Measured and Predicted’

ECB officials have suggested that the process will be “slow” and “predictable” – meaning it will not be predictable.

At the moment, the central bank applies a meeting-by-meeting process for interest rate decisions, arguing that there is a large amount of uncertainty that prevents it from guiding the market in detail in the medium term. .

“It is appropriate that the balance sheet is adjusted over time in a measured and predictable way,” Lagarde said on Monday.

As a result, economists do not expect all the details to be revealed in December.

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“In December, the ECB will present some general guidelines on how it intends to conduct QT but has not yet specified the exact amount and timing of the balance sheet,” Franziska Palmas, European economist at Capital Economics , said via email. .

It's tricky to time the ECB's money sales, economists say

He added that the upcoming changes in the balance sheet can be applied only to the APP (Asset Purchase Program) and not to the PEPP (Peace Emergency Purchase Program).

APP was launched in mid-2014 to cope with persistently low price levels. It freezes between January and October 2019 and lasts until July 2022. On the other hand, PEPP is a flexible bond purchase program introduced during the coronavirus pandemic.

As part of a broader stimulus policy, the ECB has been reinvesting the money it made during these asset purchases. Instead of starting to unwind its balance sheet by selling real bonds, some expect the ECB to stop investing in these funds.

“The ECB will reduce the APP used only by stopping the refinancing of growing APP assets, not by actively selling them. The process of QT may be very slow at first, and the ECB still reinvesting most of the proceeds from growing assets,” Palmas said.

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Economists at Nomura also expect the ECB to reduce these investments as a first step in reducing its balance sheet.

“We believe that the ECB will allow only 1/3 of the bailout of the APP portfolio to be withdrawn, and the rest will be invested,” they said in an analysis after the last ECB meeting. This is seen starting in the second quarter of 2023, according to a note.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management and an enthusiastic ECB watcher, said the bank “will introduce a so-called cap on monthly refinancing under APP program, in which the ECB will stop reinvesting the proceeds in the reserve fund. “

He added that this could start in March.

The ECB’s net purchases of government debt until October 2022 stood at 2.74 billion euros.

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