Decision to end ECB reinvestments takes back seat to rate hikes, sources say

By Balazs Koranyi

JACKSON HOLE, Wyo. (Reuters) – The European Central Bank could soon start talks on ending reinvestments of cash maturing in its 3.3 trillion euro ($3.3 trillion) Asset Purchase Programme, but a decision is not urgent and is unlikely to be taken next month, sources close to the discussion said on Thursday.

Facing record-high inflation, the ECB started raising interest rates last month, and more hikes are coming later this year as the central bank looks to stop the surge in price growth from becoming entrenched.

While a reduction in the ECB’s balance sheet would be a natural next step in normalising policy, policymakers are now focused on rate hikes and see reinvestments as a secondary issue, four sources with direct knowledge of the situation told Reuters on condition of anonymity.

The ECB’s long-standing guidance stipulates that reinvestments will continue for an “an extended period” past the first rate hike, but ECB board member Isabel Schnabel recently said that some policymakers could raise the issue already at the Sept. 8 meeting.

An ECB spokesman declined to comment.

Redemptions in the APP are set to total 337 billion euros over the next year, with three-quarters of that sum in government bonds, according to ECB data. Reinvestments in a smaller pandemic-related emergency scheme are set to end in 2024.

The sources said that discussions on ending redemptions have yet to start and policymakers have not even had a seminar on the issue, which is normally a precursor to any decision.

“There is just no urgency,” one of the sources said. “I think interest rates are our main focus right now.”

Markets have fully priced in the prospect that the ECB will raise its policy rate by 50 basis points to 0.5% in September, and see further increases at every subsequent meeting this year.

“A decision on rates coupled with reinvestments may be too much for markets and there’s no point in taking that risk right now,” another source added.

($1 = 1.0030 euros)

(Reporting by Balazs Koranyi; Editing by Paul Simao)