ECB to announce QT program details at December meeting

Christine Lagarde, President of the European Central Bank speaks at the event. The central bank is due to meet in mid-December to make more monetary decisions.

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The European Central Bank may be on the verge of answering a looming question in the coming weeks that could have a major impact on financial markets.

At its December meeting, the ECB is expected to discuss and reveal details of how it will withdraw 8.8 trillion euros ($9.21 trillion) from its balance sheet – in a process known as excessive tightening.

Over the years, the central bank has been very loose with its monetary policy, buying up all the debt in Europe to keep borrowing costs low for governments and, in turn, to help stimulate growth.

However, with inflation and more inflation under its belt, markets are now waiting for more information on how and when the ECB will sell these bonds.

“The big question in December is what they’re going to do about QT,” Marchel Alexandrovich, European economist at Saltmarsh Economics, told CNBC by phone.

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In October, ECB President Christine Lagarde said that discussions on bond sales will take into account three main factors: the level of inflation, the measures taken so far, and the global recession – because it takes time for any monetary decision to have an impact. wealth.

Speaking on Monday, Lagarde confirmed the timing. “In December, we will again implement the main policy of reducing bonds in our purchasing program,” he told European lawmakers.

‘Measuring and predicting’

ECB officials have said that this will be done “gradually” and “predictably” – meaning it will not affect dependents.

Currently, the central bank is using a meeting-by-meeting approach to interest rate decisions, arguing that there is too much uncertainty that prevents it from leading the markets with medium-term details.

“It is important that the policy paper is sustainable over time in a well-known way,” Lagarde said on Monday.

Therefore, economists do not expect anything to be announced in December.

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“In December, the ECB will announce its intention to do QT but has not yet specified the amount and timing,” Franziska Palmas, European economist at Capital Economics, said by email. .

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He said that the upcoming changes in the financial statements will be applied to the APP (Asset Purchase Program) and not to the PEPP (Pandemic Emergency Purchase Program).

The APP was launched in mid-2014 to combat the sharp decline in prices. It was frozen between January and October 2019 and lasted until July 2022. On the other hand, PEPP was a flexible bond buying program that was introduced during the coronavirus pandemic.

As part of a wider stimulus package, the ECB has been clawing back the profits it made on these purchases. Instead of starting to release its money by selling real bonds, some hope that the ECB will stop this refinancing.

“The ECB will reduce APP’s assets only if they stop repaying APP’s growing assets, not selling them. The QT movement may be slow at first, with the ECB recovering more money from the growing assets,” Palmas said.

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Economists at Nomura also expect the ECB to reduce this rate hike as the first step in easing its monetary policy.

“We believe that the ECB will allow only 1/3 of the APP bailouts to be withdrawn, and the rest to be repaid,” he said in a research note after the last ECB meeting. This is seen from the second quarter of 2023, according to the same.

Frederik Ducrozet, head of financial research at Pictet Wealth Management and an active observer of the ECB, said the bank “will probably introduce so-called monthly repayments under the APP program, where the ECB will stop repaying the money that comes from the maturity of securities. .”

He said that this could start in March.

The ECB’s increase in public debt from October 2022 stood at 2.74 trillion euros.

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