Some ECB Officials Weigh Faster Reduction of Bond Portfolio

(Bloomberg) — 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.

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Accelerating the moves on bond holdings would add to the steps the ECB is already taking to tighten monetary policy and get inflation under control. The bulk of that battle has so far come from an unprecedented bout of interest-rate increases, something that President Christine Lagarde said Tuesday isn’t done yet.

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.

Euro-area inflation has slowed from its 2022 peak, but it’s still about three times the ECB’s 2% goal, and underlying price pressures remain a worry. Policy makers got some good news on Wednesday, with data from Italy showing inflation in the region’s third-largest economy slowed more than forecast to 6.7%.

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 under the Asset Purchase Program next month.

Speaking in Sintra, Portugal, where the ECB is holding its annual retreat, Governing Council member Boris Vujcic said halting APP reinvestments “has put the balance sheet on a trajectory of gradual shrinking.”

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“There might be further decisions but at the moment I think this is what we will do,” he said on Bloomberg Television.

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 APP 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 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.

(Updates with Italian inflation, comments from ECB’s Vujcic starting in fifth paragraph)

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