Some hawkish European Central Bank officials are pondering options to speed up the reduction of the institution’s €5 trillion ($5.5 trillion) stash of bonds, according to people familiar with the debate.
While some are open to considering sales of securities from the ECB’s portfolio to complement steps taken to date, others would prefer phasing out the reinvestments of bonds bought during the pandemic, said the people, who asked not to be identified because the matter is private.
No formal discussion has taken place in the Governing Council and no decision is imminent, they said. An ECB spokesperson declined to comment.
Any move would add impetus to the wind-down of past stimulus that got underway last year as inflation surged. The bulk of the effort to return price gains to 2% has come from an unprecedented bout of interest-rate increases that President Christine Lagarde said Tuesday isn’t done yet.
Having halted net asset purchases, the ECB began shrinking its bond portfolio in March by allowing an average of €15 billion a month roll off, rather than be reinvested as before. It will fully halt reinvestments next month — roughly doubling that pace.
But with a balance sheet still exceeding €7 trillion, the impact of the process remains relatively small. A bigger reduction has come from the repayment of cheap long-term financing that officials handed out to banks during the pandemic. This week alone, more than €500 billion is set to be returned, mostly as a large chunk of the loans matures.
Active sales of securities from the €3.2 trillion Asset Purchase Program — amassed when inflation was too low — could be a logical next step after these so-called TLTRO loans have been fully repaid at end-2024, one of the people said.
But others were more opposed to the idea, with one highlighting that APP sales would lead to big losses at some euro-zone central banks, which bought the bonds when yields were low.
Prices have slumped since the ECB started lifting borrowing costs, and while officials stress that they’re not setting policy to turn a profit, they’re aware of the public outrage that losses and speculation over potential recapitalizations risks.
Another policymaker pointed to challenges in implementing bond sales within the 20-nation euro area.
Some of the people said it’s still a more attractive option to sell bonds bought under the APP than to reduce a separate, €1.7 trillion pandemic portfolio. That’s because reinvestments under that program, known as PEPP, have been earmarked for deployment across other jurisdictions, should signs of undue market stress appear there.
Bundesbank President Joachim Nagel has hinted publicly that that policy may be reviewed within due course. He said last week that “for now,” the ECB intends to continue those reinvestments through the end of next year.
The debate about the balance sheet is part of a wider discussion on how the ECB implements policy — a process that’s due to wrap up in the coming months.
--With assistance from Joao Lima.