ECB: A passive quantitative tightening (without bond sales)?

ECB bonds

Germán García Mellado (A&G) | Regarding interest rates, we expect a 50 basis point rise for Thursday’s meeting, placing the deposit facility at 2%. We do not believe that Lagarde will specify the steps to be taken for the first meetings in 2023 or detail the terminal rate of this cycle of rate hikes. She will therefore maintain a stance similar to that shown since the post-summer meetings, in which she makes future decisions conditional on the data that are published. At the press conference, she will probably continue to maintain a firm tone to combat high inflation, but with nods to the economic weakness that is hovering over the euro area, as was the case at the meeting at end-October. In this respect, we will have to keep an eye on the new macroeconomic projections to be published by the ECB, where growth and inflation data for the coming years will be updated.

The market is waiting for the ECB’s decisions to reduce the balance sheet. After learning that, in the two early repayment windows of the TLTROs, the reduction in this way (743 billion euros) has probably not been as high as anticipated, we will have to see the pace and timing of the balance sheet reduction through the bond purchase programmes.

We do not expect quantitative tightening to affect the pandemic purchase programme (PEPP). Its maturities may continue to be reinvested until the end of 2024, thus giving the ECB room for manoeuvre to handle moments of market volatility due to the flexibility of this programme. We therefore expect the reduction in purchases to be articulated through the APP, by not reinvesting a similar or slightly lower amount than the maturities that will occur from March or April 2023 onwards. This passive quantitative tightening (without bond sales) articulated through the non-reinvestment of part of the APP programme would have a limited impact on peripheral risk premia and ECB-eligible corporate credit.

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