Exclusive: ECB Insider: QT Decision ‘Easier’, Less Controversial than Rate Hike

20 December 2022

Exclusive: ECB Insider: QT Decision ‘Easier’, Less Controversial than Rate Hike
- ECB insider: No insistence on QT sequence with respect to TLTRO repayments or rate hikes
- ECB insider: Average €15 billion a month of QT ‘a very good start’
- ECB insider: ‘Most likely’ that all maturing bonds will be treated equally
- ECB insider: In terms of QT, ‘we have not done anything that markets were not expecting’

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s decision last week to initiate a gradual reduction of its balance sheet next year ran up against notably less internal resistance than the rate hike the Governing Council opted for on the same occasion, according to a Eurosystem insider who spoke to Econostream.

As the ECB announced on Thursday, an average of €15 billion per month of maturing securities acquired under the asset purchase programme (APP) will not be reinvested from March through the second quarter, with the pace thereafter to be determined.

This aspect of the monetary policy meeting outcome was ‘easier to decide’ and ‘not controversial’, the insider said. In particular, he said, there was no serious effort to subject quantitative tightening to the sequencing some Council members had expressed a desire for previously, either with respect to TLTRO repayments or rate hikes.

What comes after 2Q would depend on how well things go, but the average monthly amount of maturing assets not reinvested was likely to remain the same or increase, he said. Pre-committing too much would not be a good idea, in which respect the decision strikes the proper balance, he said.

By the same token, it was ‘not yet’ clear where the ECB wanted to be in a year with regard to its QT efforts, he said. ‘There’s no point at the very beginning to pre-committing and determining the overall path. It would not be logical.’

Whilst expressing the sentiment ‘the quicker the better’ with regard to making progress on QT, rather than be troubled by the small starting volume relative to the approximately €5 trillion size of the balance sheet, this person suggested that the choice of a ‘moderate’ €15 billion a month was in fact ideal.

‘This was the number that was more or less expected by the market, so it’s a very good start’, he said.

Whether all maturing bonds would be treated equally in the sense of reinvestment not leaning towards certain maturities remained ‘something to be decided’, he said, but would ‘most likely’ be the case. ECB President Christine Lagarde said that the Council would announce ‘detailed parameters’ in February.

In any case, one shouldn’t expect, for example, that maturing German bonds tend not to be reinvested, while their Italian counterparts are, he said.

‘That would be in a way another PEPP-type flexibility or something like this, so no, I wouldn’t say so’, he said. ‘But that’s something to be decided.’

Although Lagarde on Thursday appeared to suggest that QT was not working in the background, this Council member clearly considered that it was and lauded precisely this aspect of it.

‘I very much agree that this is a tool which should be running in the background, looking how it’s functioning and kind of calibrating according to the situation that you have at that particular moment’, he said.

It was also a ‘very good decision’ to consider QT, as Lagarde stated, a complement to standard policy tools, he said.

Asked about nervousness regarding how markets would accept QT, this person dismissed such fears.

‘How should they react? They expected this’, he said. ‘It’s already priced in. So, we have not done anything that markets were not expecting. That’s why I like it, basically.’