ECB Starts Talks on How to Shrink €5.1 Trillion Asset Hoard
(Bloomberg) – Officials at the European Central Bank last week began discussions about how to downsize its 5.1 trillion euros ($4.9 trillion) portfolio as they seek to increase the scope of their monetary tightening time to expand.
“The Governing Council discussed the merits of its instruments, including interest rate hikes and downward balance sheet adjustments,” Luxembourg central bank governor Gaston Reinesch said Wednesday in a blog post about events at an Oct. 5-6 meeting. “The pace and timing of the data-driven balance sheet reduction will be determined in due course.”
Officials have signaled that no such move towards so-called quantitative tightening would take place until interest rates are neither restrictive nor accommodative, a stance reiterated by French politician Francois Villeroy de Galhau late Tuesday. While rate hikes are likely both this month and in December, opinions differ on how much borrowing costs will need to rise to reach this neutral level.
The ongoing discussion is a sensitive one, as the financial market crises in the UK in recent weeks have highlighted, after the Bank of England’s plans to shrink its own balance sheet clashed with the government’s ambitions for unfunded tax cuts. With Italy’s mammoth debt in the spotlight, any decision to reduce the ECB’s treasury would also mean selling that country’s securities.
“Bond markets have become much, much more sensitive to debt sustainability issues,” said Dutch central bank governor Klaas Knot, who indicated that the ECB would aim to remain calm to investors. “A process like QT – it should be predictable, it should be gradual, it should even be a bit boring.”
He told Bloomberg Television that officials are “catching up on it as we go,” though he used the Federal Reserve’s experience as an example.
“Janet Yellen once joked that it’s like watching paint dry, and I think that’s a bit like how you want to design a program like this,” he said.
The Dutchman differentiated the ECB’s position from the BOE, which had been buying far more long-dated bonds than the euro-zone’s broad spectrum of maturities.
“You have to be actively selling,” he said. “We in the Eurozone, like the US, have bonds for the full term and we believe we can do QT simply by unwinding existing bonds by doing less than full reinvestment, which of course is a smoother process.”
Elsewhere in Washington, ECB President Christine Lagarde signaled that talks on the issue will take a while.
“Of course, the question arises as to how the net asset purchases, which have now been halted, are to be reversed: with what horizon, at what pace,” she said. “It’s a discussion we started and will continue.”
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