Exclusive: ECB Insider: We’ll Discuss QT in December; Lagarde Won’t Try to Delay It Indefinitely

30 November 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s Governing Council is likely to renew at its December monetary policy meeting the discussion of how to reduce the size of the ECB’s balance sheet further, in the view of a Eurosystem insider who spoke to Econostream recently.

Though himself one of many in favour of accelerating the process of quantitative tightening, this person said he was not disappointed by the absence of such a discussion on the agenda of the October meeting, held in Athens.

‘I was surprised that there was no discussion of that’, he said. ‘But I can live with it. We'll discuss it in the next meeting is all. But most of us thought there would be a discussion about this.’

December was not too early for such a discussion, he said, overriding the objection that the approach to further quantitative tightening was intrinsically linked to consideration of the ECB’s operational framework and that this was apparently being delayed until next year.

‘These things don’t have to wait for the final decision on the operating framework’, he said. ‘Yes, it’s all interconnected, but in any event, we are going to remain under conditions of extremely ample liquidity for a while. And that opens the door to making decisions on the PEPP or the appropriate reserve requirements earlier than the ultimate decision on the operational framework we want.’

Moreover, he said, it might not be advisable to arrive too quickly at a final decision on the desired operational framework. It would be sufficient to keep markets reasonably abreast of ECB thinking on the subject, he said.

Based on the extent to which Council members already agree about the desirability of doing something about the PEPP, there should be no need for that discussion to extend over multiple meetings, he said.

However, there was a natural inclination on the part of some to push the outcome into 2024, since even January of the year in which PEPP reinvestments would most likely end no matter what would be regarded as preferable to any month, including December, of the previous year, he said.

‘She [ECB President Christine Lagarde] won’t try to defer it indefinitely’, he said. ‘But even deferring it just to the extent we already have makes it less meaningful, because we are approaching 2024. And the longer we wait, the less meaningful the decision becomes.’

He denied that concerns about financial markets were a reason to kick the PEPP can down the road. Markets already suspected that a decision to upend current PEPP forward guidance could come and should have little trouble under current conditions absorbing the relatively small amount of additional bonds that would need non-Eurosystem takers, he argued.

There had been ‘surprisingly little’ fragmentation of the euro area this year, with the two episodes both ‘totally understandable’, he said, referring to Italian fiscal developments and spillovers from the US.

‘And that’s literally all that happened’, he said. ‘So, I fail to see any connection with the PEPP.’ In any case, he added, the ECB is perfectly capable of exercising the necessary flexibility without the PEPP.

‘We can have it under the APP just as well’, he said. ‘We can just say that if there is unwarranted fragmentation, we might, within some limits, reallocate as needed.’

The ECB sets the rules and can adapt these with the necessary swiftness, he reminded. Assertions that the PEPP’s flexibility somehow made it indispensable were thus a false argument, he agreed.

It would not be desirable to, as some have suggested at least considering, sell outright assets acquired under the APP before ending reinvestments under the PEPP, this person said.

‘We should simply stop reinvestments first’, he said. ‘It doesn't make sense to sell with one hand and buy with the other. The reinvestments should end and then we can start to sell.’