The board of the European Central Bank (ECB) met in mid-June. This showed, among other things, that the bank wants to stop buying government bonds from December 31, but that the process of so-called reinvestments will continue as usual.
The process of reinvestments concerns the reinvestment of the ECB's income, obtained because the bank has been buying up bonds for years. As its owner, the bank receives interest payments and repayments, and the ECB will continue to buy bonds with those proceeds after December 31 of this year. This concerns amounts between €160 billion and €200 billion per year.
Policy change
However, a subtle change has recently been announced, which could have far-reaching consequences for interest rates in the European Union. Under current rules, the ECB must reinvest the money no later than 2 months after receipt. In short: if the bank received €5 billion in interest payments and repayments in mid-July, that money must be reinvested by the end of September at the latest.
Another rule is that the interest payments and repayments on or from government bonds must be reinvested in the country of origin. In short: when a German government bond matures and is redeemed, that money must remain in Germany. However, this only applies to the yields on government bonds. This does not apply to the funds released on corporate bonds. That money may then be reinvested in corporate bonds throughout the eurozone.
Statement from the ECB
The ECB board has indicated that it expects to do so after September, provided that the inflation figures confirm the bank's idea that inflation will rise towards 2% in the medium term, reducing the monthly purchase amount of the bonds to €15 billion until the end of December (previously this was €30 billion). She then wants to stop making net purchases.
The above comes from the press statement of the ECB. The crux, however, lies in the piece: "... to stop net purchases of bonds". Why is that so important? Well, because the rules state that the incoming funds from the government bond portfolio "must be reinvested in the country of origin, during the period in which the bank is engaged in net purchases of bonds". This means that if the bank stops making purchases, this provision no longer applies and the money can be invested anywhere in the euro zone.
During the same press statement, ECB CEO Mario Draghi a comment that is very important in this respect. Draghi said the ECB plans to review the rules on reinvestments in the coming months. "That is an important decision. It is not just a decision," said Draghi. And he is right about that. During the annual ECB conference in Sintra (Portugal), he repeated this again and added that it will mainly be about the "rhythm of the reinvestment policy".
Delete rules
If we look at all this together, the ECB could well decide sometime in the coming months to remove the rule that reinvestments must be made within 2 months. In combination with the aforementioned provision that the money must remain in the country of origin, this could mean that the ECB can freely spend around €2019 billion to €160 billion on bonds in the course of 200 and can deploy them when and where they want. deems necessary. This may mean that the bank can buy bonds from a euro country where interest rates are starting to rise (for whatever reason) (for example Italy).
The consequence of this may be that the bank (in times of unrest) can enter the market and restore calm. However, it could also become a new source of disagreement within and outside the ECB board. I am the first to admit that this is very much like a 'linguistic-legal nail-biting'.
The fact is and remains that (in the world of central banking) the position of each comma can be crucial, just like the precise meaning of words. Not paying attention to this would be more serious than looking for nails in low monetary waters.
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