MNI BRIEF: Demand Key To Size Of ECB Balance Sheet - Schnabel

The extent to which the ECB can shrink its balance sheet will depend mainly on market demand, Executive Board member Isabel Schnabel said in a speech Thursday, with the prospect of reduced central bank bond holdings likely to have led to portfolio balancing even before run-off began this month.

“Over time, balance sheet run-off will reduce our market footprint, improve market liquidity and lower the Eurosystem’s exposure to credit and duration risk, recovering valuable policy space,” she said. (see MNI INTERVIEW: ECB Could End APP Reinvestments in Q3 - Kazaks).

“By how much we will ultimately reduce our bond holdings will mainly depend on the demand for central bank reserves, stemming both from autonomous factors and from the banking sector, as well as the operational framework that we intend to implement in the medium run,” Schnabel added.