MNI POLICY: ECB's Reinvestment Wind-Down Equates To 25bp Hike

Many ECB policymakers believe the wind-up of APP reinvestments will eventually be equivalent to around 25bp in deposit rate rate tightening, although the impact is not a one-off and will be felt over a longer period of time, MNI understands.

Because of the slow burn of tapering reinvestments over a period of many months, it doesn't have as quick a policy transmission impact as a 25bp rate hike, but over the cycle it would equate to roughly the same.

At the same time, the ECB is determined to use interest rates as its main policy tool while QT runs in the background to gradually reduce its balance sheet. (See MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance)

APP, PEPP

The ECB started to taper reinvestments of maturing government bonds acquired under its Asset Purchase Programme from March 2023, and announced in April that it intended to stop reinvestments completely from July.

However reinvestments from its Pandemic Emergency Purchase Programme are set to continue through at least the end of 2024, the ECB confirmed this month, adding they would still be used flexibly as a first line of defence against overly volatile sovereign bond spreads.

ECB President Christine Lagarde told a press conference after the Governing Council meeting on May 4 that the impact of the APP run-off was "not material", without giving further details. At the weekend, ECB Vice President Luis de Guindos said the impact of the Bank's QT had probably added 65-70bp to longer-term eurozone government bond yields, but he provided no estimate of its equivalent in benchmark rate hikes.

An ECB spokesperson declined to comment.