The European Central Bank (ECB) is reassessing its approach to managing its €1.7 trillion ($1.8 trillion) bond holdings in response to the ongoing aftermath of the Covid-19 pandemic. The ECB will initiate discussions this week in Athens, focusing on potentially discontinuing Pandemic Emergency Purchase Programme (PEPP) reinvestments before the end-2024 deadline.
According to InvestingPro, PEPP has been experiencing a declining trend in earnings per share, and analysts anticipate a sales decline in the current year. Despite this, the company has remained profitable over the last twelve months and has had a strong return over the last five years. It's also worth noting that PEPP operates with a moderate level of debt, and its liquid assets exceed short-term obligations. More details about PEPP's performance and additional tips can be found on InvestingPro.
Reinhard Cluse, UBS's Chief Economist, supports such a move ahead of any interest rate cuts, aiming to prevent investor confusion. This would synchronize the ECB's quantitative-tightening strategies with its interest-rate policy, which has already seen 10 consecutive increases to counter inflation. Madis Muller, a member of the Governing Council, also endorses an early halt to PEPP reinvestments, aligning it with the ECB's interest-rate policy.
Fiscal uncertainties in countries like Italy and potential delays in reforming European Union fiscal rules have led some officials to view PEPP purchases as crucial. This perspective is particularly relevant given the instability of the Italian bond market. Barclays (LON:BARC) economists have reported that about €18 billion a month matures under PEPP.
Ulrike Kastens from DWS German asset manager suggests that while bond reinvestments are extensive, they may not be appropriate for the current economic environment. A recent Bloomberg poll indicated a growing number of economists expect an early termination of PEPP reinvestments.
Morgan Stanley (NYSE:MS) anticipates an announcement in December about reducing reinvestments as soon as March. A forthcoming review of the ECB's operational framework could necessitate additional time. For investors interested in monitoring these developments, InvestingPro offers real-time metrics and various other tips.
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