ECB Insight: Governing Council More Than Ready to Discuss QT, but Is Lagarde?

7 December 2023

By David Barwick – FRANKFURT (Econostream) – After kicking the QT can down the road at the European Central Bank Governing Council’s meeting in Athens at the end of October, ECB President Christine Lagarde could finally be ready to broach the subject at the next such gathering one week from today.


At least one Council member, Croatian National Bank Governor Boris Vujčić, has directly stated publicly his expectation that December would be the month in which this discussion was launched, while others have speculated similarly in the context of background conversations.


National central bank heads are not always abreast of what the ECB chief has in store for them at monetary policy meetings, and some have confessed privately to being surprised by the absence of a QT discussion from the agenda in Athens.


If however the ‘not-too-distant future’, in which Lagarde on 27 November said the Council ‘would re-examine possibly this proposal’ to accelerate QT, is not understood to exclude December on the grounds of insufficient distance, then they have better reason to think that this time, the issue will come up.


In our reading, her wording by no means equates to ‘not before 25 January', the date of the subsequent monetary policy meeting. Furthermore, Lagarde, assuming she doesn’t wish to be seen as a tease, would have had to realise that her comments would stoke expectations for December.


December also has a practical advantage versus October, beyond the fact that Council members were more inclined on the previous occasion to fete their retiring colleague, Banca d’Italia Governor Ignazio Visco, celebrate Greece’s return to investment grade and significant GDP growth, and generally enjoy the Athenian atmosphere.


More importantly, initiating the discussion around the fate of the PEPP in October suffered from one potential flaw less relevant to a December start, namely that a speedy resolution to the debate could have led to a decision in the current year, which we think appears suboptimal to Lagarde.


The point here is that upending forward guidance is a bone of contention. And deciding to do so in the year that PEPP reinvestments, according to that guidance, might have ended anyway – i.e. 2024 – is thus probably seen as preferable to making the same decision already in the previous year, 2023.


In other words, by deferring the decision until the new year, the ECB will still be breaking its promise, but less so.


With no rate move requiring deliberation at the December meeting, and a high degree of agreement about the desirability of modifying the approach to the PEPP, significant progress could be made, allowing the ECB to reach a conclusion early next year, which is what we expect, on balance.


True, it has been variously asserted that such a decision needed to await a decision on the operating framework. However, as we reported on 30 November, there exists another perspective, according to which the latter is no indispensable precondition.


We suspect that Executive Board member Isabel Schnabel shares this view, given comments by her earlier this week that would appear to pave the way for an early decision on the PEPP.


It’s clear that discussion is going to come’, she said, explicitly citing Lagarde’s previous declaration. ‘It’s also clear that at some point we’re going to fully end PEPP reinvestments. The amounts involved are relatively small and markets are expecting this to happen, so I think it’s not such a big deal.’


Without being entirely sure what ECB Vice President Luis de Guindos was getting at, he does not sound in any case as if balance sheet reduction had to take a back seat to the consideration of the operational framework.

‘[W]e are starting to reduce our balance sheet’, he said on 22 November. ‘I think the operational framework will have to adapt to that situation, but that adaptation has to take place with flexibility.’


The group of national central bank governors who have expressed a more or less clear desire just in recent weeks to get the QT show on the road is neither small nor devoid of relatively influential Council members, including for example the following:


  • Joachim Nagel (Bundesbank)
    ‘In my opinion, the rate of [balance sheet] reduction can therefore increase.’ (30 November)


  • François Villeroy de Galhau (Banque de France)
    ‘Regarding balance sheet policies, we will have to discontinue our PEPP reinvestments in due time – and possibly earlier than end 2024.’ (20 November)


  • Klaas Knot (De Nederlandsche Bank)
    ‘To date, this ‘quantitative tightening’ has been smooth and well-absorbed by financial markets. This is similar to what we see from our international peers, who – in fact – are reducing their balance sheet at a relatively faster pace.’ (02 November)


  • Pierre Wunsch (Belgian National Bank)
    Because we have announced we would, it’s the only argument I can see to [keep reinvesting under the PEPP]. I think it’s a commitment that has no value today, we should reopen the discussion. … We are going to stop reinvestments anyway relatively soon. So, I would plead for reopening the discussion and maybe accelerating it a little bit.’ (17 November)


  • Mārtiņš Kazāks (Latvijas Banka)

‘Balance sheet to be reduced in a gradual and orderly manner, but no reason to linger on’ (06 December)


  • Robert Holzmann (Austrian National Bank)

‘[M]y optimistic understanding is that now, the problem is well defined, that there needs to be a solution.’ (06 November)


  • Gabriel Makhlouf (Central Bank of Ireland)
    ‘I expect us to report losses in the years ahead as a result of the monetary policy measures taken in the pursuit of price stability over the past decade, coupled with the current level of interest rates to return inflation to our target.  But that is one of the consequences of having our balance sheet as a policy tool and our overriding commitment to deliver price stability.’ (31 October)


There are naturally some opposed to accelerating the balance sheet reduction, or at least wanting to do it carefully:

  • Fabio Panetta (Banca d’Italia)
    ‘[W]e need to proceed cautiously with the normalisation of the Eurosystem’s balance sheet. Having raised our policy interest rates to a level that would restore price stability, a sharp reduction in the Eurosystem’s balance sheet, after the rapid reduction of recent months, could have a contractionary effect on the economy that would not be justified by the inflation outlook.’ (30 November)

  • Yannis Stournaras (Bank of Greece)
    Changing PEPP forward guidance ‘would break a commitment — that could affect our credibility and, therefore, the effectiveness of our policies.’ (29 November)


In the end, though, as seen in October, it is the decision of the Executive Board and thus first and foremost Lagarde to schedule discussion of the matter or not.


She managed then to get away with confounding the expectations of many observers and insiders and omitting it, which calls to mind what we had written ahead of that Governing Council meeting:


‘Lagarde herself has of late consistently avoided encouraging the speculation about an acceleration of QT that would potentially start with a revision of the PEPP forward guidance. That reticence should stand her in good stead on Thursday.’


It would be misguided to think that she has irrevocably committed herself now. The ‘not-too-distant future’ certainly also includes 25 January, and a déjà vu outcome is not excluded on 14 December.


However, what we wrote in October about her being prepared to defer this agenda item would no longer be quite as valid. Her own recent pronouncements will not stand her in as good stead as a repetition of her earlier silence would have if she has to be asked why the subject was again not tabled.


All in all, we are led to think that a discussion of QT is somewhat more likely than not in December.