“This could be the beginning of the end of ultra-loose monetary policy”

The Association of German Pfandbrief Banks (vdp) welcomes yesterday’s decision by the ECB, but at the same time urges it to go even further:

“It is good that the ECB is now going to roll back its bond purchases faster than originally planned. However, it still has not specified a definitive end date for the APP,” vdp’s Chief Executive, Jens Tolckmitt, noted critically.

Having already decided in recent months to make purchases under the Pandemic Emergency Purchase Programme (PEPP) only until the end of March of this year, it decided yesterday to reduce the volume of purchases under the conventional Asset Purchase Programme (AAP) more quickly than initially planned. Specifically, it now plans to double the volume to EUR 40 billion only during April (no longer during the entire second quarter), to acquire EUR 30 billion of additional securities in May (which it had originally planned to do over the entire third quarter) and to reduce the purchase volume back down to EUR 20 billion as originally planned as early as June (instead of holding off on this until after the third quarter). It is still uncertain whether the APP will be maintained at this level in the third quarter of this year or, indeed, possibly terminated. At any rate, ECB President Christine Lagarde announced that an interest-rate hike is possible in the third quarter after the bond purchases end.

But even if the PEPP is about to expire soon, and with the APP possibly expiring in the autumn, that does not mean that the ECB will no longer be the main buyer of securities, inasmuch as the money from maturing PEPP securities, for example, will be reinvested at least until the end of 2024. The same is to be expected if the APP is terminated. For the third and fourth quarters of 2022 alone, APP maturities of around EUR 16 billion will be available for reinvestment.

“This latest step by the ECB could now actually be the beginning of the end of ultra-loose monetary policy. But many additional steps still remain as it is clear that, even after the PEPP and APP are officially ended, for some time the ECB will continue to be the most important market player, as money from maturing securities will be reinvested over the next few years, at a minimum. As a result, over the medium term, there will be no change in the distorted yield environment we have seen since the inception of the purchase programme in 2009,” emphasised Tolckmitt.