QT kicks off at the ECB: assets have fallen by 91 billion euros since the peak

Galloping inflation puts an end to an absurdity.

By Wolf Richter for WOLF STREET.

Total assets on the ECB’s gargantuan balance sheet as of August 5, released today, fell by €18 billion from the previous week, to €8.75 trillion. This was the fifth week-over-week decline in the past six weeks.

Assets fell by 90 billion euros from the June 24 peak to the lowest level since March 25. But given this gigantic pile of assets, the €90 billion drop, which would normally seem huge to normal people, is only a 1% drop.

The ECB’s two QE asset classes – loans linked to monetary policy operations and securities portfolios – both declined:

  • Lending peaked on June 27, 2021 and has since fallen from €92 billion to €2.22 billion.
  • Securities holdings peaked on June 26, 2022 and have since declined by €13 billion to €4.44 billion.

On July 21, the ECB announced a 50 basis point rate hike on all its key rates, bringing its deposit rate to 0.0%, ending its absurd policy of negative interest rates .

Around this time, the ECB also announced a new tool – the Transmission Protection Instrument (TPI) – which would allow the ECB to carry out quantitative tightening without triggering a euro debt crisis where yields government bonds of fiscally weaker eurozone countries are soaring, threatening their ability to roll over maturing debt and issue new debt.

During the Euro debt crisis, soaring sovereign bond yields pushed Greece to default on its government bonds and threatened other countries, such as Italy, Spain, Portugal and Ireland.

The TPI is designed to head off a sovereign debt crisis and keep the eurozone stuck, even as the ECB hikes rates and sheds assets to fight runaway inflation. It’s called the anti-fragmentation tool for this purpose. I call it the glue gun.

Under this policy, the ECB is able to unevenly shed assets, for example by allowing German and French assets to roll faster than Italian or Spanish assets.

The final effect is still QT, with an overall decline in assets held, but this QT is unevenly distributed among the sovereign bonds of different countries. This may mean that the ECB’s bond holdings of some countries, such as Italy, may not decline, or may even increase, as its holdings of German, French, Austrian and Dutch bonds may fall more sharply.

And it sort of works: the spread between the German 10-year yield and the Italian 10-year yield is currently 2.14 percentage points, with the German yield at 0.92% and the Italian yield at 3 .06%. And this is considered to be within the acceptable range.

Why QT and Rate Hikes? The worst inflation in the history of the ECB.

In its history of just over two decades, the ECB has never encountered the kind of runaway inflation that is currently tearing member states’ economies apart. And people get very frustrated.

The headline consumer price inflation rate for the Eurozone in July reached 8.9%:

But inflation rates vary widely from country to country. In Germany, the inflation rate is 8.5%. In seven countries, the inflation rate is between 10% and 13%: the Netherlands, Belgium, Greece, Spain, Cyprus, Slovenia and Slovakia. And in three countries, the inflation rate is above 20%: Estonia, Latvia, Lithuania. That’s one hell of inflation.

The ECB is ridiculously far behind the curve with 8.75 trillion euros of assets still on the balance sheet, and declining too slowly, and with interest rates at 0%, while inflation is at 8.9% . At this point, the ECB is still throwing a lot of highly volatile monetary fuel into the raging inflation fire. It’s still an inflation arsonist, not an inflation fighter. But he takes the first hesitant steps in the right direction, albeit too slowly, too little and far too late.

But the ECB managed to do QT before, and quite significantly: in the two years 2013 and 2014, its total assets fell by about a third. But the chart also shows how insanely crazy the ECB got afterwards, especially in March 2020, and that the huge surge in inflation should really come as no surprise to anyone:

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