As the risk of stagflation scenarios gains momentum, ideas to cut excess liquidity (close to €3.5trn) and the costly size of the ECB’s huge balance sheet are re-emerging. And the problem for credit markets, and especially peripheral ones, is that the ECB may already be looking for alternatives. According to Reuters, the ECB is discussing the option of accelerating the end of the Pandemic Emergency Purchase Programme (PEPP) from early 2024 (or spring). According to Peter Kazimir yesterday, he would prefer to wait another 6 months before taking a decision on the PEPP.
Something that would be in line with the market expectations gathered in the ECB’s survey (SMA) published yesterday (and to which Lagarde has alluded to several times): 75% of the market expects an announcement on PEPP reinvestments after the next two monetary policy meetings and lower reinvestments since 1H24. The second idea that the ECB is considering, according to Reuters, would be to raise the cash ratio from 1% (or c€170mm) to levels of 3-4%. Something that, depending on the institution and liquidity levels, in addition to the impact on profitability, could once again translate into pressure on peripheral sovereign markets if this leads to the sale of BTPs/SPGBs for example.