MNI INTERVIEW2: ECB To Discuss PEPP Reinvestment In Dec-Vujcic

The European Central Bank will discuss the future of reinvestments from its pandemic emergency purchase programme before the end of 2023, Croatian National Bank governor Boris Vujcic told MNI, adding that a final decision may take some months.

The issue is just one aspect of the ECB’s Operational Strategy Review, Vujcic said, with policymakers due to report in the spring on how they plan to reach an optimally-sized balance sheet.

But with some Governing Council members feeling time is running out to discuss the speed at which reinvestments from PEPP - currently running until the end of 2024 - are wound down, it appears the Governing Council is set to debate the issue in the coming weeks. (See MNI INTERVIEW: September Rate Rise Probably ECB's Last- Simkus)

BALANCE SHEET TOO LARGE

“It has been agreed that we will have that discussion later on in the year. In my view, it is a cross-cutting issue that includes the discussion of the balance sheet size, the speed of its reduction, operational framework, and to a lesser extent, at the moment, of the monetary policy stance,” Vucjic said in an interview. (See MNI INTERVIEW: ECB Should Hold Until At Least Spring-Vujcic)

“Everything will eventually be on the table, including quantitative easing tools like PEPP, or a role for reserve requirements as a temporary sterilisation tool. I think it’s good to discuss it all together, as no one part of that discussion is completely independent of the other.”

Every member of the Governing Council agrees that the balance sheet is “way too large,” Vujcic said.

“It is a consequence of the fact that large expansion of a balance sheet followed the zero lower bound constraint, while on the way back interest rate increases preceded the balance sheet normalisation. Exit from the unconventional monetary policy is sequentially different from the entry into it, which has its own consequences.”