Net markets close in March, but PEPP is not being decommissioned


The European Central Bank (ECB) has announced that it will end its net asset purchases through the Pandemic Asset Scheme (PEPP) next March, but has decided to extend its reinvestment in one year) in response to market uncertainty due to the coronavirus in the shadow of the Omicron variant.

At the same time, in its announcement after yesterday’s meeting of its Governing Council, the ECB underlined that the future roll-off of the PEPP portfolio will be regulated in such a way as to avoid interference in the appropriate direction of monetary policy, while “the net PEPP markets could be restarted, if necessary, to address the negative pandemic-related disturbances. “

According to the ECB, total purchases of Cypriot government bonds by the end of November reached € 2.42 billion, with net purchases of Cypriot bonds in November amounting to € 53 million. From the initial level of € 750 billion, the PEPP ceiling was doubled (by € 600 billion in June 2020 by another € 500 billion in December 2020) to € 1.85 trillion. The total value of the program on December 10 amounted to € 1.56 trillion.

“Given the uncertainty we wanted to have as much flexibility as possible and as many options as possible,” said ECB President Christine Lagarde.

The reference to Greek bonds was important, as the ECB in its decision made it clear that the flexibility “could include the purchase of bonds issued by the Hellenic Republic in addition to the value of the bonds reinvested at maturity, in order to avoid interruption of markets in this country, which could negatively affect the transmission of monetary policy to the Greek economy, while it is still recovering from the effects of the pandemic.

It is noted that as Greece’s credit rating is not in the investment category, with the expiration of the PEPP Greece could not be included in the ECB Regular Asset Purchasing Program (APP) and the Public Sector Asset Purchasing Program (PSPP).

“So this is a strong signal and it is a country-specific clause and this clause has been strongly supported by the Board,” Ms. Largard said.

The APP continues with a gradual decrease

In addition, in the context of the gradual reduction of asset markets and in order to ensure that the direction of monetary policy remains consistent with the stabilization of inflation at its target in the medium term, the Governing Council decided to conduct net asset purchases at a monthly rate of € 40 billion. the second quarter and € 30 billion. the third quarter through the asset purchase program (APP).

In April 2002, net purchases through the APP increased to € 40 billion. so as to offset the end of the clean PEPP markets so that the transition to after PEPP is smooth (avoid cliff-effect).

From October 2022 onwards, the Board of Directors will maintain net asset purchases under the APP program at a monthly rate of € 20 billion “for as long as is deemed necessary to enhance the easing effect of its policy rates”.

The Governing Council expects net purchases to expire shortly before the ECB’s key interest rates begin to rise, it said.

According to the latest data, the purchases of Cypriot government bonds through the PSPP amounted to € 4.09 billion at the end of November, with the net purchases in the specific month amounting to € 53 million.

Moreover, reports that the Governing Council expects net purchases to expire shortly before the ECB’s base rate hikes begin are indicative of the start of interest rate hikes in 2023.  

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