In its June 9th press releases, the European Central Bank, ECB, explained its ambition to continue tightening monetary policy in the currency union. Based on new forecasts of inflation and economic growth, the ECB Governing Council
decided to take further steps in normalising its monetary policy. Throughout this process, the Governing Council will maintain optionality, data-dependence, gradualism and flexibility in the conduct of monetary policy.
One of its actions is to end the nest asset purchase program (APP) by July 1st. Since its inception in 2014, the APP has accumulated a portfolio of €3.4 trillion worth of bonds. Almost 80% of these assets are sovereign debt.
The ECB intends to reinvest the principal payments from maturing securities under the APP “for an extended period of time.”
Under its ambition to tighten monetary policy, the ECB will end its reinvestment of principal payments from its Pandemic Emergency Purchase Program, PEPP, by 2024. Here, however, the ECB expresses some concern, with a notable mention of one specific euro-zone state:
In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction
The caveat regarding Greece comes as there are more signs of a possible new debt crisis in Europe.
In line with prior commitments, the ECB pledges to continue to raise interest rates, with one increase expected in July and one in September. The Bank also explains:
Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate.
While the ECB remains committed to monetary tightening, the annual growth rate in the M1 money-supply measure for the euro zone still shows significant expansion. In the first quarter of this year, M1 expanded at 8.9% over the same period in 2021. The April growth rate was 8.5%.
