Christine Lagarde’s ECB will announce il via al Quantitative Tightening (QT)hitherto only specter for BTPs and other euro area government bonds, at the imminent next meeting of the Governing Council, scheduled for mid-December?
The die may have already been cast: economists and strategists have been making forecasts for weeks on what, in addition to the rate hike and the new conditions of loans to TLTRO banks, it is the bazooka against inflation present in the arsenal of the ECB: the QT-Quantitative Tighteningi.e. the process with a central bank deciding to reduce its balance sheet.
In the case of the ECB, it is a budget that has been inflated by the BTPs and all other Eurozone sovereign bonds that the institution has purchased, to protect them from speculation, and to protect the respective state coffers.
For now we know that the number one of the Eurotower, Christine Lagardepromised to start reducing the budget and thus launch the QT “in a moderate way”: the details of how the bond unwinding process should take place will be decided, remember Antoine Bouvet, Senior Strategist, Rates Division at ING, right at the next meeting of the ECB, scheduled for December.
QT: appeal to the ECB especially from Germany and the Netherlands
They are on Twitter Bouvet addressed the QT issue referring to the latest statements from the members of the Governing Council of the ECB:
among them Klaas Knot, the number one of the Central Bank of Hollandwhich, in addition to pointing out that Frankfurt “still has a lot of work to do” before interest rates reach their peak (therefore before reaching the terminal rate, the value of which has not yet been disclosed), he also said that “count on the fact that QT will help tighten monetary policy”once the neutral rate has been reached. It should be remembered that, last Friday, Knot said he expects that “Neutral territory on rates will be reached at next month’s Governing Council meeting.”
At that point, monetary policy will become restrictive with further rate hikes, again with the aim of dampening inflation.
It will be then that “it will become more likely to decrease the size of rate hikes”, provided, however, that you also start to demobilize the APP program from 3.3 trillion eurosnoto come Asset Purchase Programme.
And even earlier – Bouvet points out – “Knot seems to be in favor to a 50 basis point squeeze in the December meeting that brings rates to the neutral level”.
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The onset of the QT was certainly not wished for only by the central banker of Holland.
The ING strategist also mentioned the president of the Bundesbank, the central bank of Germany, Joachim Nagelwho underlined the urgency that the QT start at the beginning of 2023: in this way, according to the German banker – hawkish like my Dutch colleague – the ECB would confirm “Strong Determination” to bring down inflation, while continuing to launch “mosse decisiveon interest rates.
According to Nagel “sit would indeed be wrong refrain from taking further decisive measures for fear of an economic slowdown”.
But the number one of the German central bank went even further, asking the stop of reinvestments: “We should start reducing the size of bond holdings early next year, no longer even doing full reinvestments of all bonds that mature.”. Including the €3.3 trillion in bonds it holds under the APP programme, the ECB holds a total of 5 trillion euros of BTP & Co.
Days ago always from Germany, in particular by the rating agency Scope, the more or less explicit exhortation to the ECB to launch the QT has arrived.
So in the note:
“For monetary policy to bring inflation in the euro area back to 2%, a significant reduction in overall demand will probably be required, as inflation was mainly driven by supply-side factors, and not by growth (by economy) higher and by the increase in wages”. And it’s “it is unlikely that the ECB will be able to hit the 2% target without launching a Quantitative Tightening (QT to be precise),that is, without reducing the amount of government bonds on its balance sheet“.
QT, the alert: don’t be too aggressive
It’s just a matter of time:
the BTPs (and all the other government bonds of the euro area), parked in the balance sheet of the ECB are close to being unloaded, and therefore to see their value reduced. According to Antoine Bouvet of ING, inter alia, the European Central Bank would not even have great excuses to postpone the possible adoption of the QT, given that sovereign debt spreads, (in the case of Italy the BTP-Bund spread), have narrowed a lot in recent weeks.
“Precisely the reduction of spreads – warns Boivet – could bring falcons (of the ECB, like the central bankers of Holland and Germany) to call for an even more aggressive QT roadmap“.
Ma “this would be a mistake – warned the strategist – In fact, starting the QT would already be an achievement, and we do not share the opinion according to which a limited repayment of TLTRO loans (by banks) would imply a faster QT“.
In this regard, according to what was reported by the Sole 24 Ore, last week in Italy to repay the loans at subsidized rates granted by the ECB, precisely i TLTRO, it was only Intesa SanPaolo, with 13 billion; “UniCredit, Mps, Banco Bpm, Bper and Popolare di Sondrio” they chose to hold “an additional liquidity reserve, at no cost”.
As regards the subject of rates, a Reuters article points out that the markets are now betting on a terminal rate, therefore on the peak in rates, just below 3%, a factor that suggests hikes of another 150 basis points by the ECB between now and mid-2023.
The neutral rate, or what should neither stimulate nor ballast the economy, instead, a deposit rate of between 1.5% and 2% is considered.
At the moment, this rate is 1.5%, which is at the low end of the range considered “neutral”.
Scope Ratings has already warned that “the new context of high inflation will test the independence of the ECB and its ability to stabilize prices without triggering a sovereign debt crisis“. (with BTPs and other sovereign debts that are precisely subject to the threat of Quantitative Tightening).
Christine Lagarde’s ECB announced on October 27th a new maxi rate hike of +75 basis points, after the historic one, the first of that intensity since the birth of the euro on 8 September last. Interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will be raised respectively al 2,00%, al 2,25% e all’1,50%.