Schnabel: Market Expectations of QT Have Complemented ECB Tightening

2 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel said on Thursday that markets' quantitative tightening (QT) expectations had contributed to rising yields in the euro area and thus complemented the ECB’s rate hikes.

In a speech to the ECB’s Money Market Contact Group, Schnabel said that the effects of QT were likely to have been weaker than those of quantitative easing (QE) at the beginning of the pandemic..

ECB staff estimated that ‘the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP) had jointly compressed the ten-year GDP-weighted risk premia of the four largest euro area countries by around 180bp by the end of 2020’, she said. Market expectations of ECB balance sheet reduction ‘are estimated to have reversed around 40bp of this peak impact since September 2021.’

‘Prospects of QT are therefore likely to have complemented the tightening from changes in our key policy rates before balance sheet run-off actually began’, she concluded.

Rate hikes were ‘currently the primary tool for restoring price stability’, she reminded. At the same time, the accommodative effect of the ECB’s swollen balance sheet ‘may run counter to our efforts to bring inflation back to our 2% target in a timely manner', she said.

The balance sheet was ‘larger than necessary to effectively implement our monetary policy stance’, she said.

The assets held by the central bank might also tie its hands if deflationary risks were to return, she warned: ‘[M]aintaining a large bond portfolio absorbs valuable policy space that may be needed if policy rates were to become constrained again by the effective lower bound.’

It was 'therefore both prudent and efficient' for QT ‘gradually unwind this accommodative impact’, she said.

Issues with the availability of collateral, such as the scarcity experienced in German Bunds last year, ‘can delay, or even impair, the transmission of monetary policy', she said.

‘QT will be more efficient in alleviating general asset scarcity per unit of balance sheet change than the repayments of targeted longer-term refinancing operations (TLTROs)’, she said. This was due to the fact that the share of securities from higher-rated jurisdictions being released from the ECB’s public sector purchase programme (PSPP) portfolio was ‘substantially larger than for the collateral freed up by the TLTRO repayments.’