The next problem the European Central Bank (ECB) will have to address as part of its fight against inflation in the euro area will be the multi-trillion dollar amount of excess liquidity in banks. How reports Reuters, citing six sources, this topic will be discussed at the next ECB meeting in Athens on October 26 or as part of the regulator’s retreat.
The ECB raised its key rate for the tenth time in September, but inflation remains well above the target level of 2%. Rates are unlikely to rise until December, prompting ECB management to turn its attention to the massive amount of cash that has been pouring into the banking system over the past ten years as part of its bond-buying program, Reuters writes.
“This money supply blunts the effect of rate hikes by reducing competition for deposits and leads to large interest payments—and consequent losses—for some EU central banks,” the article says.
According to Reuters sources, measures currently being proposed to reduce excess liquidity include:
increasing the amount of reserves that banks must hold with the ECB; winding down bond purchase programs; a new system for regulating short-term interest rates.
According to Reuters sources, in particular, we are talking about a possible increase in the size of required reserves (which banks are required to keep at the central bank and on which they receive no interest) from 1% of the amount of customer deposits to a figure “that could be closer to 3%.” or 4%.” The interlocutors explain that such a step will bring double benefits: it will force cash out of the banking system and reduce the amount of interest paid by the ECB and the twenty national central banks of the eurozone on deposits.
The volume of required reserves of European banks currently stands at 165 billion euros, and this is “negligible” compared with excess liquidity of 3.7 trillion euros, writes Reuters.
A more difficult issue, according to agency sources, is the discussion of reducing the 4.8 trillion euro debt program that the ECB has amassed since 2015, mainly to prevent the risk of deflation. Most of the interlocutors believe it is possible to gradually wind down the so-called Pandemic Emergency Purchase Program (PEPP), simply by not buying new bonds as old ones expire. However, there are some concerns about the reaction of financial markets, especially investors in Italian government bonds, they note.
An ECB spokesman declined to comment.
The ECB last revised its inflation forecast on September 14, according to which price growth will be 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. “The upward revision to the inflation forecast for 2023 and 2024 primarily reflects higher energy price dynamics. Pressure on prices remains high, despite the fact that most indicators have begun to decline,” the ECB said in a statement.
2023-09-18 17:18:59
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