ECB’s €5 Trillion Problem
Without an overhaul, the ECB’s unwinding of bond holdings and long-term loans currently totaling €5.3 trillion could ultimately distort the monetary-policy mechanisms it uses to battle inflation.
ECB officials, having taken a close-run decision in September to raise rates again, are having to do some hard thinking on the whole functioning of their monetary framework.
Officials’ key priority is to shrink a balance sheet
But slimming down the balance sheet effectively means weaning the financial system off abundant central-bank liquidity. That isn’t easy, because it’s what institutions have got used to.
When the ECB started offering unlimited liquidity to all banks in 2008, that was the beginning of the end to a world where they loaned money to each other rather than relying on the central bank, and where policymakers tightly controlled the amount of money in the system to guide market rates within a corridor. Large-scale bond purchases then shut down that system for good.
Whatever ECB policymakers decide, the clock is ticking. Of the ECB’s €4.8 trillion in bond holdings, some €333 billion — about 7% — will roll off the balance sheet through next September. Another €491 billion of targeted long-term loans will expire by the end of 2024.
Bloomberg 23 October 2023
There’s a growing need for the European Central Bank to rethink how soon it starts shrinking the €1.7 trillion stash of bonds it bought during the pandemic — or risk disorienting markets down the line.
Alexander Weber and Jana Randow Bloomberg 24 October 2023
Röd öppning - Red Opening 23 October 2023
https://englundmacro.blogspot.com/2023/10/rod-oppning-red-opening-23-october-2023.html
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