ECB Insight: When it Comes to Speeding up QT, the Proponents Outnumber the Opponents

18 October 2023

By David Barwick – FRANKFURT (Econostream) – With the European Central Bank Governing Council so clearly intending to abstain from a rate hike at its monetary policy meeting in Athens next week, one might wonder how authorities will fill the void left by this non-decision, given also the absence of updated macroeconomic projections to chew over.

A conspicuous answer to that question – besides bidding farewell to retiring Banca d’Italia Governor Ignazio Visco - is: by discussing the subject of balance sheet reduction, which seems likely to amount to a discussion of whether to change the forward guidance currently applicable to the pandemic emergency purchase programme (PEPP).

Admittedly, it can’t be completely excluded for now that things will happen in another order and the asset purchase programme (APP) will be sacrificed first, but in the context of this review of the Governing Council, we seek indications of how each member is likely to regard an acceleration of QT in general (which many of them clearly also assume would focus first on the PEPP).

In a nutshell, if the issue is a possible acceleration of QT, we consider 10 Council members as being ‘clearly or probably in favour’, three ‘possibly in favour’, four in the ‘unclear/uncommitted’ category, three ‘possibly against’ and six ‘clearly or probably against’.

That said, a lot will depend on the Executive Board, which (1) appears on average to lean away from accelerating QT, and (2) is in general harder to classify, given relative reticence on the subject. As National Bank of Belgium Governor Pierre Wunsch observed in an interview with Econostream a few days ago, it will be the Board that decides when to put the item on the agenda.

Clearly or probably in favour of accelerating QT:

Bundesbank President Joachim Nagel:

  • 28 September 2023: ‘I would rather return to a leaner central bank balance sheet even more quickly. We definitely need to keep an eye on the PEPP.’

Dutch National Bank Governor Klaas Knot:

  • We have not forgotten that on 06 September 2023, Knot said: ‘The rationale for continuing the reinvestments is becoming weaker. But at the same time, we also know that reneging on earlier guidance has a cost. At this moment I don’t think we should incur this cost. But of course, there could be circumstances in which that would be different.’ One of his colleagues assures us that Knot will support modifying QT, and with circumstances indeed having changed in the last six weeks – the ECB having possibly reached the terminal rate and in any case not contemplating another rate hike for now - we consider more relevant his comment on 13 October 2023: ‘By now, as we by and large discontinued our TLTRO operations and stopped reinvesting the principal payments from maturing securities under the APP, the Eurosystem’s balance sheet is shrinking at a measurable pace. To date, this “quantitative tightening” has been smooth and well-absorbed by financial markets. The same goes for our international peers, who – in fact – are reducing their balance sheets at a relatively faster pace.’

Austrian National Bank Governor Robert Holzmann:

  • 02 October 2023: ‘In the current situation, we need to think about ending our crisis-era measures more quickly. We are already having initial successes, as we are now no longer purchasing anything at all in the Asset Purchase Program and are allowing the existing bonds to expire. That was a huge step. What usually goes unnoticed is that when it comes to targeted bank loans, only the last 500 million are outstanding, which will be repaid in the coming year. The loans had a total volume of over €2,000 billion. However, with the pandemic emergency purchase program, we have decided not to stop replacing expiring bonds with new ones until the end of 2024. We should discuss ending replacement purchases sooner. This is a very, very important point. … We haven't talked about it yet, it's still completely open. … This will be part of the discussions at the next Council meetings.’

Latvijas Banka Governor Mārtiņš Kazāks:

  • 11 October 2023: ‘Every instrument always comes with due notice. When we don’t see its use as appropriate anymore, then we can change it. And that goes for the PEPP. So I don’t subscribe to the view that terminating PEPP reinvestments earlier would be a blow to ECB credibility. The ECB has to explain itself and its reaction function carefully, but that doesn’t mean that we stick to our actions for unnecessarily long. No instrument is a sacred cow. You change it when it becomes necessary. If we can explain why, it’s a gain in credibility. … If we have time, then discussing further [balance sheet] steps in October is an opportunity that should not be missed.’

National Bank of Belgium Governor Pierre Wunsch:

  • 16 October 2023: ‘The timing of the discussion [of the PEPP] is the prerogative of the president. I'm pleading for not waiting too long before we have that discussion. If it's in October, fine; if it's a bit later, I’m fine with that as well. I don't see it as a pressing issue. I think of it more as a consistency issue: we’ve hiked interest rates a lot and are now in restrictive territory. Of course, there is some uncertainty about how restrictive, but we stopped APP reinvestments, so it naturally feels like one of our instruments is out of sync with the rest and we need to indicate an intention of making it consistent with the others.’

Eesti Pank Governor Madis Müller:

  • 16 September 2023: ‘We should have a discussion soon about how to proceed with PEPP reinvestments and for how long. There’s a strong argument in favor of stopping PEPP reinvestments sooner than the end of next year. That would be consistent with our interest rate policy.’

Central Bank of Luxembourg Governor Gaston Reinesch:

  • 09 October 2023: ‘In order to support directionally the current monetary policy stance, it would … not be entirely groundless to bring forward the end of PEPP investments. Such a decision ideally, in the absence of adverse surprises, would be taken in December at the latest and provide markets with sufficient lead-time before the start of a gradual reduction in reinvestment.’

Bank of Lithuania Chairman of the Board Gediminas Šimkus:

  • 13 October 2023: ‘We need to discuss [the PEPP] because the situation has changed — it’s very obvious. There are all the preconditions to consider stopping it earlier. … I don’t see a risk from the perspective of fragmentation.’ 26 September 2023: ‘We need to start talking about the programme sooner rather than later. We have an environment that’s changed completely from the point when the decision [on PEPP forward guidance] was made.’

Central Bank of Malta Governor Edward Scicluna:

  • 13 October 2023: ‘I think we intend to [reduce the balance sheet] - we’ve started it already - but we intend to have a programme for that, and I fully agree: we have to be careful things won’t happen like in the UK, for example, where pensions were affected and so on. So, you get collateral damage, you have to watch for that. But otherwise, I think it’s the time to start mopping up in a serious way, without upsetting the market.’

ECB Executive Board member Isabel Schnabel:

  • To be sure, like the other members of the Executive Board, Schnabel has been reticent on the subject, so our classification of her here is based mainly on her generally hawkish-than-average views.

Possibly in favour of accelerating QT:

Bank of Finland board member Tuomas Välimäki:

  • 06 September 2023: ‘Despite the shrinking balance sheet, the Eurosystem will remain the largest holder of bonds in the euro area securities markets in the years ahead. As there is no previous experience of reducing such substantial holdings, it is important that the Eurosystem continues paying attention to liquidity in the interest rate markets and to harmful market disruptions. The Eurosystem will need to carefully weigh up whether in the future it would be advisable or not to reduce the balance sheet faster than the pace at which the securities holdings and credit to banks are maturing.’

Banka Slovenije Governor Boštjan Vasle:

  • 12 October 2023: ‘I’m in favour of starting debate on next steps regarding QT. There are several options, which must be put on the table. … The current situation in the bond market is a reminder that PEPP, and the flexible reinvestment policy that comes with it, is important. … The advantages and disadvantages of a faster reduction of the [APP] programme must be carefully evaluated.’

Croatian National Bank Governor Boris Vujčić:

  • We only find innocuous pronouncements of somewhat older vintage, such as this one from 12 July 2023: ‘You asked for whether the PEPP forward guidance would be moved forward. I would say for the time being no. But it's not something which is unimaginable.’ However, Vujčić being a policy hawk, we have no problem considering him at least possibly in favour of accelerating QT.


ECB President Christine Lagarde:

  • Asked at the 14 September 2023 press conference about QT, Lagarde refused to bite: ‘[W]e regard interest rates as the key tool in the work that we are doing in order to reach our 2% medium term target. So we have not discussed the PEPP programme, the reinvestment and the forward guidance. PEPP is our flexibility instrument, as you know, and is the first line of defence if we want to defend a proper transmission of our monetary policy. We have not discussed any kind of APP outright sales.’

Banque de France Governor François Villeroy de Galhau:

  • There have been no recent comments by Villeroy on the PEPP or QT in general, but his statements on monetary policy suggest that he is at least not in a hurry to do anything further, e.g. on 12 October 2023: ‘We need to balance the risk of doing too little against the risk of doing too much — I would say these risks are now at least symmetric. In the euro area, monetary patience is now more important than activism.’

ECB Executive Board member Frank Elderson:

  • Elderson says less than any other Executive Board member about monetary policy, and nothing on this subject  

Central Bank of Ireland Governor Gabriel Makhlouf:

  • We find no recent comments by Makhlouf on this subject. In general, we view him as slightly dovish, though one of his colleagues told us recently that he might better be considered as slightly hawkish.

Possibly against accelerating QT:

ECB Chief Economist Philip Lane:

  • 16 October 2023: ‘Compared with interest rates, the role of the balance sheet is of secondary importance. The most effective way to tighten policy further, if necessary, is to further increase the interest rate. This will also keep the bond markets calm, since if investors no longer believed the ECB was tackling inflation effectively, they would demand higher interest rates.’

ECB Vice President Luis de Guindos:

  • 02 October 2023: ‘Some of my colleagues in the Governing Council have been quite outspoken with respect to the need for starting the process of quantitative tightening on the PEPP. But in the formal structure of the Council, we have not even started the discussion. It will arrive sooner or later.’

Central Bank of Cyprus Governor Constantinos Herodotou:

  • No recent comments by Herodotou found on this subject, but Herodotou is much closer to the dovish end of the spectrum.

Clearly or probably against accelerating QT:

Banco de España Governor Pablo Hernández de Cos:

  • 16 October 2023: ‘I think caution is in order. There is a connection between increasing rates and reducing the balance sheet. We decided to use rates as the main instrument for setting our monetary policy stance. In parallel, we are also reducing our balance sheet, which complements our monetary policy tightening. And our September assessment is based on the combination of both instruments. Indeed, the ECB has reduced its balance sheet far more robustly than other central banks. If at any point we discuss changing the current path of balance sheet reduction, we will have to assess the degree of tightening provided by the combination of these two tools and to what extent such action would be compatible with reaching the inflation target in the medium term. Including of course the fact that, as I have said, financial conditions have tightened further over the last weeks. In other words, we have to be consistent with our framework. And then there is the important issue of PEPP reinvestments standing as the first line of defence against potential fragmentation in the transmission of our monetary policy. Admittedly, over the last year or so such fragmentation has been very limited. But we can’t exactly say how much this owes precisely to the PEPP’s dual role, including its role as the first line of defence against fragmentation. In addition, the slower growth setting and the additional tightening imported from the US has to be factored in. So having this first line of defence is to be welcomed. A further dimension of balance sheet policy that is coming into ever sharper relief is liquidity provision. This is being studied as part of the ongoing operational framework review. But it’s certainly important in terms of setting the PEPP discussion in the right perspective. In any event, all this is also a reminder that reducing fiscal deficits and debt has to be taken seriously.’

National Bank of Slovakia Governor Peter Kažimír:

  • 14 October 2023: ‘I don’t expect changes to PEPP before the summer. We first have to be sure to be done with rate hikes. The logic order of our toolbox is important.’ 05 October 2023: ‘We’re ready for debate [on the PEPP], but we shouldn’t touch the buttons of reducing the balance sheet at a different pace. We’ll come to this topic only after we’re sure we won’t have to raise rates further.’

Bank of Greece Governor Yannis Stournaras:

  • 12 October 2023: ‘PEPP flexibility is here to stay. The implementation has to be discussed in the Governing Council of the ECB who have not discussed it yet. There is no change. So the rules we have decided they still apply. It is a first line of defence. But as I said, there is no urgency, we have no concerns at the moment regarding Italy or any other member state. … No, I see no value in bringing it [the end of PEPP reinvestments] forward especially now under the new uncertainty we have because of the events in Israel and Palestine. So we need to keep our flexibility and act if necessary by using the PEPP flexibility and it's very early to talk about using the TPI.’

ECB Executive Board member Fabio Panetta:

  • Panetta is another one to have avoided commenting publicly on this issue. However, in his case for the purpose of this tally, it doesn’t matter much.

Banco de Portugal Governor Mario Centeno:

  • 11 October 2023: ‘So, if we start discussing these other instruments because they are in our toolkit and we need to of course adjust them over time, that would be very good news for all of us, because it means that we think inflation is in a good path towards our aim. And so, at that point - but to me, honestly, it will be only at that point - we should and we need to start debating the other instruments and adjusting them so that we create space in our balance sheet. We need to reduce the balance sheet, that’s for sure. When and by how much, it will depend on our evaluation on the success that we are having in terms of inflation…’ Also on 11 October 2023: ‘We need to take all these decisions [on measures other than interest rates] in due time and not rush and jump from objective to objective. … So, if at this stage we jump into different domains of our policies … this risks harming transmission and our message that we are focused on fighting inflation.’

Banca d’Italia Governor Ignazio Visco:

  • 13 October 2023: ‘The differential of the Italian rates with respect to the German is relevant, but it’s far from that [of the debt crisis]. And there are no signs really that it should rise really in a territory which would require us to intervene. But if there was a need, I think we can. It has to do with this PEPP being maintained. We decided really to keep it until the end of 2024. I think that’s a good approach, also to somehow tranquilise the markets. But I don’t think that we should really have all this worry and tension now.’