ECB: Excess Liquidity Increases But Downtrend Still Clear

Eurozone excess liquidity increased by E8.17bln during the w/c June 16 (weekly average), bringing the measure to E2.714trn as of last Friday, June 20. Once again, this minor increase shouldn't raise questions around the longer-term of an orderly downtrend - the weekly moving average continues to decrease on a broader view, printing E61.1bln less than 30 days earlier. Excess liquidity has declined by 43% from the series' high of E4.748trn in November 2022.

• The long-term decline since the peak has mostly been driven by a roll-off of the ECB's TLTROs (with the TLTRO III programme starting in 2019 with three-year maturities and with the final maturity in Dec 2024) as well as of the ECB's Monetary Policy Positions (MPPs), which are standing at a current E3.992tln combined.
• Amongst the MPPs, the ECB envisages a further average monthly roll-off of around E13.6bln of the PEPP through Dec-26 and of around E28.4bln of the APP through Jul-26 (respective f'cast horizons).

Yesterday, ECB's Nagel gave some commentary on potential aspects of future structural operations of the ECB and the time the ECB still has to make decisions on (Nagel Sticks To Previous Stance On Current MonPol; Speaks on Liquidity, speech here):

• "While the macroeconomic effects of quantitative easing have been extensively studied, quantitative tightening, particularly for the euro area, remains a largely unexplored field. However, the overall impact of quantitative tightening is likely to be weaker than that of quantitative easing".
• "Taken together, the phasing out of our asset purchase programs should therefore have only a minor impact on the monetary policy stance. We also indirectly take this effect into account when setting the key interest rate level. Medium- and long-term interest rates are directly incorporated into the Eurosystem's inflation forecasts, which form a key basis for our monetary policy decisions".
• "By agreeing on structural operations, we have already set the fundamental course very early on. However, the precise design of the structural operations and their relationship to one another after the expiration of the monetary policy securities holdings are questions for the future. These decisions still have time to be made".
• "In a structural portfolio, for example, fewer bonds with longer maturities and more bonds with shorter maturities could help reduce the impact on the term premium. Sensibly limited maturities of structural refinancing operations would allow for a timely response to potential declines in liquidity needs".
• "One thing is clear: the target volume of a structural portfolio should be in a reasonable proportion to the volume of bonds available for purchase. To avoid market distortions, only small portions of individual issues should be purchased".