Belgium, (Brussels Morning Newspaper) The European Central Bank (ECB) upped interest rates by 50 basis points on Thursday and presented its plan to mop up cash from the banking system.
The ECB noted that its bond holdings under the Asset Purchase Programme (APP) stand at some 5 trillion euros and announced it would mop up roughly 15 billion euros each month from March to June next year.
Speaking at a press conference, ECB President Christine Lagarde stated “we believe that it is totally legitimate, appropriate, and actually efficient to go in the direction of reducing the size of our balance sheet, to do that in a measured and predictable way.”
She pointed out that the move, coupled with rate hikes, will make it more expensive for governments and companies to borrow money.
Lagarde noted that the ECB decided to mop up approximately 15 billion euro per month because that is about 50% of the money it would receive from maturing bonds over the period.
Rate hikes as the main tool
“It seemed an appropriate number in order to normalize our balance sheet, bearing in mind that the key tool is the interest rate,” she stressed.
Since it launched the APP to address deflationary risks in 2017, the ECB made roughly 3.3 trillion euro worth of purchases and became the largest creditor in many eurozone countries.
“The Governing Council will regularly reassess the pace of the APP portfolio reduction to ensure it remains consistent with the overall monetary policy strategy and stance, to preserve market functioning, and to maintain firm control over short-term money market condition,” the bank noted in a statement.
Piet Christiansen, the chief analyst of the Danish central bank, pointed out that most analysts expected the ECB to outline quantitative tightening (QT) plans, rather than come forward with a concrete plan.
“The fact that they already came with a decision to start QT first of March, that is the surprising part,” he concluded.
ECB’s decision to start tightening its expansive monetary policy follows similar steps of other large central banks earlier this year.
Eurozone government bond yields increased in the wake of the ECB’s latest decision that will push EU member states to sell their debts to private investors.
