Speculation is mounting the European Central Bank will shrink its bond portfolio at a quicker pace to ensure it keeps financing conditions tight as the end of its rate-hiking cycle approaches.
Traders are betting the ECB is almost done lifting borrowing costs as evidence of the economic damage inflicted by tighter monetary policy builds up. But with longer-term real rates failing to rise in response this year, analysts at ING Group NV, Mizuho International Plc and AFS Group suggest the central bank may seek to shrink its bond holdings at a faster lick.
Evelyne Gomez-Liechti, a rates strategist at Mizuho, said the ECB will start considering changes to quantitative tightening, or the process by which it shrinks its balance sheet, even if, as she expects, policymakers choose to hike rates again next week. Still-elevated inflation “calls for a tight policy stance, especially where policy is still loose –- the long end of the curve,” he said.The gap between US and German 10-year real yields has grown to around the widest since late 2022, as inflation-protected Treasuries sold off and German equivalents stagnated.
For now, reinvestments under its pandemic program of debt purchases — PEPP — are expected to run at least through the end of 2024, even as bonds bought under an older program are allowed to roll off.
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