Exclusive: ECB Insider: October Council Meeting an Obvious Candidate to Exchange Views on QT

26 September 2023

By David Barwick – FRANKFURT (Econostream) – The October monetary policy meeting of the European Central Bank’s Governing Council would be a sensible occasion for authorities to start discussing seriously the further reduction of the ECB’s balance sheet, in the view of a Eurosystem insider who spoke to Econostream recently.

It ‘could be’ that the topic of quantitative tightening moves into the foreground at the 26 October meeting, especially given the likely absence of any need to contemplate what to do with the ECB’s main monetary policy of instruments, namely interest rates, and the importance of approaching a substantive shift carefully, this person said.

‘It’s an obvious candidate … to have the first exchange of views’, he said.

This policymaker made no bones about his own support for accelerating the pace at which the ECB draws down its balance sheet. ‘It would be logical to conclude the hiking cycle by doing something on reinvestments’, which – next to rate hikes – was simply the ‘other dimension’ of current monetary policy tightening, he said.

The objection raised recently by Governing Council member Klaas Knot, who cautioned against reneging on forward guidance with regard to PEPP reinvestments, did not mean that the ECB should unconditionally pursue a policy that had become otherwise unwise, he argued.

‘Is monetary policy logical and sensible on the basis of new information or not?’ he asked rhetorically. ‘So, the credibility dimension is there, but if it is well explained, it could be mitigated. The situation is different.’

Until it became clearer that the ECB was done hiking, there was a good chance that the discussion of what to do on the QT front would remain a discussion, he indicated. After all, the fact that the subject of re-examining QT had suddenly re-emerged was due at least in part to the likelihood that the ECB was at or very near the end of interest rate hikes, he said.

 Triggering market tensions was not a particular concern of this person, who noted that spreads were currently ‘fine’.

‘I do not think if we would change the reinvestment decision now that it would create turbulences’, he said. ‘With the APP, there was a fear and it was justified, but when we stopped the reinvestments, it did not create any.’

Moreover, ‘we have this protection instrument [TPI], which one should not forget’, he added.

More fundamentally, though, the PEPP was established to deal with a situation ‘when the market was on the brink of collapsing, when we had low inflation, when we had a pandemic’, he said. That none of this was the case today was ‘not the best economic justification’ for stopping reinvestments, but nonetheless ‘an additional justification’, he said.