The inflation outlook continues to be too high for too long,” the ECB said in its announcement today. “We had long discussions about core inflation and underlying inflation,” ECB president Christine Lagarde said at the press conference, a reference to services inflation spiking to a record 5.2% in April, and “core” inflation (without energy) at 7.5%.
Higher rates: So the ECB hiked its policy rates by 25 basis points, despite stresses in the banking system. Since the rate-hike cycle started in July 2022, the ECB has hiked by 375 basis points, raising the deposit rate from -0.5% to +3.25%, the biggest rate-hike cycle in its history, to the highest rates since 2011, to fight the worst inflation in four decades. “We’re not pausing, that’s very clear,” Lagarde said. “We know we have more ground to cover,” she said.
Faster QT: The ECB also announced that it would sharply accelerate its Quantitative Tightening (QT) program related to its bond holdings. It has already started to unwind its loans last year. The bond holdings started to decline this year. In total, the ECB’s balance sheet has dropped by €1.12 trillion since the peak in June last year.
Lagarde made numerous comments in the press conference to hammer home that there will be more rate hikes: “We’re continuing this hiking process,” she said. “We know we have more ground to cover,” and “this is a journey, and we have not arrived yet.”
She also said – reiterating what the monetary policy statement said – that corporate loan demand was “really, really down,” and that reports from companies indicate that rates are now restrictive.
She said that some governors had wanted a 50-basis point hike, and others a 25-basis point hike, but none wanted to keep rates unchanged.
QT to accelerate.
Back in the day when the ECB was still piling up assets and ballooning its balance sheet, it used two tools: Initially, it relied on giving out highly incentivized loans to banks (without collateral); then, as it saw that the Fed was buying piles of bonds, the ECB started to buy large amounts of bonds as well.
As part of the start of QT last fall, the ECB made the terms of the loans less attractive, and banks began repaying them in huge chunks. This year, it started unwinding some of its bond holdings, by letting maturing bonds roll off at a pace capped at €15 billion per month.
Today, the ECB announced that it would remove the €15 billion cap and will let the roll-off proceed at whatever rate the bonds mature each month.
The ECB holds €4.89 trillion in QE bonds (“securities held for monetary policy purposes”), as of the current balance sheet. These bond holdings fall into two categories: the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP).
It’s the €3.24 trillion in APP holdings that are currently being reduced by QT, capped at a roll-off of €15 billion a month through June. Today the ECB announced that it would remove the cap in July, which will roughly double the pace of the roll-off of the APP bonds.
Total assets have plunged by €1.12 trillion from the peak last June. The large vertical spikes and plunges since 2020 are due to the loans (the Targeted Longer-Term Refinancing Operations or TLTRO III):