Decision to end ECB reinvestments backfires on rate hikes, sources say

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Signage is seen outside the European Central Bank (ECB) building in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay

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JACKSON HOLE, Wyo., Aug 25 (Reuters) – The European Central Bank may soon begin talks on ending maturing cash reinvestments in its 3.3 trillion-euro asset purchase program (3.3 trillion billions of dollars), but a decision is not urgent and unlikely to be. taken next month, sources close to the discussion said on Thursday.

Faced with record inflation, the ECB began raising interest rates last month, with more hikes to come later this year as the central bank seeks to stave off surging price growth in s ‘root.

While a reduction in the ECB’s balance sheet would be a natural next step in policy normalization, policymakers are now focusing on rate hikes and viewing reinvestments as a side issue, four sources with knowledge told Reuters. directly from the situation on condition of anonymity.

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Long-standing ECB guidelines say reinvestments will continue for “an extended period” after the first rate hike, but ECB board member Isabel Schnabel recently said some policymakers may already raise the issue at the September 8 meeting.

An ECB spokesman declined to comment.

Redemptions in the APP are expected to total 337 billion euros over the next year, three-quarters of them in government bonds, according to ECB data. Reinvestments in a small pandemic-related emergency program are scheduled to end in 2024.

The sources said talks about ending takeovers had yet to begin and policymakers had not even held a seminar on the issue, which is normally a precursor to any decision.

“There’s just no rush,” one of the sources said. “I think interest rates are our main focus right now.”

Markets have fully priced in the prospect that the ECB will raise its key rate by 50 basis points to 0.5% in September, and will see further hikes at each subsequent meeting this year.

“A rate decision coupled with reinvestments may be too much for the markets and there is no point in taking that risk at this time,” another source added.

($1 = 1.0030 euros)

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Reporting by Balazs Koranyi; Editing by Paul Simao

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