ECB Bond Buying Could End in Q3

A prominent member of the European Central Bank’s Governing Council has said its net asset purchases could end in the third quarter of this year, but tweaks to the bank’s monetary policy could mean that rate hikes might not immediately follow.

Francois Villeroy de Galhau, the governor of France’s central bank, told CNBC Tuesday that soaring inflation and geopolitical risks mean that the central bank should bring a level of “optionality” into its thinking when it meets again on March 10.

“For me, increased optionality means that probably we should decide about an end date of the net asset purchases ... And I think it could be the around Q3, but the precise point needs to be discussed,” he said.

Bond buying under the ECB’s 1.85 trillion euro ($2.19 trillion) Pandemic Emergency Purchase Program, or PEPP, is due to end in March. But purchases under the older Asset Purchase Program, or APP, are being ramped up to serve as a quantitative easing bridge through the end of the PEPP.

The APP had continued at a monthly pace of 20 billion euros in conjunction with the PEPP. But it will rise to 40 billion euros in the second quarter, 30 billion euros in the third quarter, and then back down to 20 billion euros “for as long as necessary.” The ECB also expects all bond buying to stop “shortly before it starts raising the key ECB interest rates.”

But Villeroy suggested that the timeline for these stages could be altered, telling CNBC that the “shortly” wording in the ECB’s guidance could be dropped. Thus, an end to bond buying in the third quarter might not necessarily mean a rate hike in the fourth quarter.

“I am asking whether we should not drop this ‘shortly,’ in order to have more options about the calendar of the second step,” he said.