ECB’s Schnabel: Balance Sheet Reduction Progressing ‘Smoothly’, Not Seeing Many Concerns Materialise

7 November 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank Executive Board member Isabel Schnabel said on Thursday that the ECB’s balance sheet was shrinking smoothly and that the process had had a positive impact on market functioning.

In a speech at the annual ECB Conference on Money Markets in Frankfurt, Schnabel said that ‘many of the concerns over the potential impact of the decline in our balance sheet on the economy have not materialised’.

The gradual rundown of redemption reinvestments did not obstruct bond market functioning, according to Schnabel.

‘Foreign investors have been absorbing the largest share of the net issuance of bonds in the euro area since the Eurosystem ended its reinvestment of securities under the asset purchase programme (APP), with households also playing an important role in some economies’, she said.

Also, interest rates had not registered a sharp rise as a result of the reduction of the ECB’s balance sheet, she stated.

‘While the term premium initially increased from historically unprecedented negative territory, it has recently fallen again and stabilised at low levels’, she said.

For Schnabel, the subdued impact on the term premium was a result of the gradualism and transparency that had guided central banks in the rundown of their balance sheets.

‘This gradualism is probably one reason why announcements of quantitative tightening are often found to have smaller effects on bond prices than announcements of quantitative easing’, she said.

Weak credit growth cannot be related to lower excess liquidity or the ECB’s balance sheet decisions, she said. ‘Instead, it has been, by and large, the result of weak loan demand and higher interest rates.’