The central bank hiked interest rates again on Thursday.
(Photo: dpa)
Frankfurt Monetary policy at the ECB is likely to start a debate next month about reducing bond holdings swollen by years of trillion-dollar asset purchase programs, Reuters news agency reports, citing four insiders. Some were hoping for a decision on a gradual reduction in bond holdings in December.
Such a balance sheet reduction by the ECB would have a major impact on bond markets. Because the euro central bank has been a big buyer on the market in recent years. According to the report, the move would probably result in higher financing costs for countries and companies in the euro area.
Discussions would likely start at a meeting of the Governing Council on October 5 in Cyprus, Reuters insiders said. They could then likely be continued at the rates meeting three weeks later.
Some expected a decision by the end of the year. Other euro watchdogs, on the other hand, would not see any rush as they currently regard interest rates as the central monetary policy instrument. Balance sheet reduction via a reduction in bond holdings is often referred to in the industry as quantitative tightening (QT).
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A spokesman for the ECB commented on the information that the Governing Council had not yet discussed the content or timing of future quantitative tightening. So far, the euro central bank has held out the prospect of replacing expiring bonds from its APP purchase program with new bonds for a longer period of time, even after the first interest rate hike. Monetary authorities intend to continue this for as long as necessary to ensure ample liquidity and maintain “an appropriate monetary policy stance”.
Second rate step
The ECB initiated the turnaround in interest rates in July and raised interest rates for the second time in a row on Thursday. The ECB also wants to replace maturing bonds with new bonds as part of its PEPP pandemic purchase program by at least the end of 2024. One of the insiders thought it was unlikely that anything would change.
According to Reuters, some euro watchdogs considered a reduction in APP holdings by phasing out the papers as a logical next step. Others, on the other hand, feared that this would cause yields on long-dated government bonds to rise too quickly. They also have an eye on possible effects on market liquidity.
In the US, the Federal Reserve is already in full swing to reduce bond holdings. The Fed started doing this in June. It plans to reinforce this course even further by raising the monthly cuts target to $95 billion starting this September.
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