FRANKFURT (Reuters) – The European Central Bank said on Thursday it would start reducing its 5 trillion euro ($5.3 trillion) bond portfolio from March, its next step towards tighter policy as it tries to combat decades-high inflation.
The ECB said it would reduce its Asset Purchase Programme (APP) bond holdings at an average pace of 15 billion euros per month starting in March until the end of the second quarter, with the subsequent pace to be determined over time.
It will do so by not reinvesting part of its maturing bond holdings. More detailed parameters for the reduction will be provided at its February meeting, the ECB said.
By raising longer-term borrowing costs, the reduction should tighten financial conditions, making it more expensive for firms and governments to borrow.
It will complement traditional rate hikes, which mostly lift short-term funding costs. The ECB raised its policy rates by another 50 basis points on Thursday, bringing the total rise since July to 250 basis points, an unprecedented pace.
“The asset purchase programme (APP) portfolio will decline at a measured and predictable pace,” the ECB said in a statement.
“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 conditions.”
The 3.3 trillion euros of purchases made under the APP account for the bulk of the ECB’s debt holdings. Launched in 2015 to combat deflationary risks, the scheme has seen the bank evolve into the leading creditor of many euro zone governments.
The ECB will continue to support debt markets, as the plan excludes the 1.7 trillion euros of debt it has bought through its more flexible Pandemic Emergency Purchase Programme (PEPP) since the height of the COVID-19 pandemic in 2020. The ECB had previously decided to continue replacing maturing PEPP debt until end-2024.
The process of running debt off the balance sheet, known as quantitative tightening, follows a similar step by the U.S. Federal Reserve earlier this year.
The ECB has already reduced its balance sheet by taking back 800 billion euros of ultra-cheap funding from banks, but at 8 trillion euros its total assets remain exceptionally large by historic standards.
Investors will now watch for further details expected at ECB President Christine Lagarde’s press conference at 1345 GMT news conference.
($1 = 0.9407 euros)
(Reporting by Yoruk Bahceli; Editing by Catherine Evans)
