ECB sources: ECB is considering tweaks to PEPP reinvestment plans to addess market stress - BBG

According to sources cited by Bloomberg, the ECB is considering tweaks to its PEPP reinvestment plans. The sources said that the bank might add geographical flexibility to the reinvestments, or might extent the reinvestment time under the emergency programme. A final decision on changes to the PEPP reinvestment plans has not yet been reached, the sources added.

At present, the ECB plans to reinvest all of the proceeds from the bonds it bought under the Pandemic Emergency Purchase Programme (coupons and principal payments) until the end of 2023. By extending this for longer, the bank would delay quantitative tightening - this is when the bank allows the bonds in its portfolio to expire, reducing the size of its balance sheet over time. The aim of this is to provide greater levels of monetary support for longer. 

Meanwhile, the potential to add geographical flexibility to the purchases suggests that the ECB is keenly interested in preventing significant divergence between the bond yields of Eurozone nations, likely with an eye to preventing a repeat of the crises in the early 2010s.  

The ECB meets next Thursday and the main topic of discussion/point of contention is what the bank will do with its Asset Purchase Programme (APP) once the PEPP expires at the end of March. Separate ECB sources suggested earlier in the session on Thursday that there has been a convergence of views on some sort of limited, temporary bump to purchases conducted under the APP. 

Market Reaction

The euro has barely reacted to the latest ECB sources and EUR/USD continues to gradually ebb lower, though for now remains above 1.1300.