The ECB announces a micro-reduction of its balance sheet

In parallel with a new rate hike, the ECB announces a microscopic reduction in its balance sheet as well as the greening of its printing press.

The ECB stays the course

The European Central Bank raised its key rate in the wake of the Fed. However, its increase is twice as high (0.50% against 0.25% for the Fed). The key rate of the ECB now stands at 3% against 4.75% across the Atlantic.

And like Jêrome Powell, Christine Lagarde has already warned that another increase of 0.50% in March. It is most likely to be expected that subsequent rate hikes will be reduced to 0.25%.

The President of the ECB said that “The slowdown in inflation is mainly linked to the drop in energy prices”but was very cautious about the future.

Indeed, the reopening of China and geopolitical tensions will not help. As such, OPEC come to lower its oil production again. However, this drop will be modest, at 60,000 barrels per day on a total production of 29.1 million bpd.

The ECB has also announced its intention to reduce its balance sheet by a small 15 billion euros per month from March until the end of June 2023, when the pace of these reductions will be adjusted.

In other words, it will take 28 years to resell the 5,135 billion euros of debt bought back by the ECB… For comparison, the Fed has already sold 500 billion dollars of debt (out of a total of $8,000).

You have to realize that the Fed and the ECB have monetized a debt equivalent to 35% of GDP. Selling these debts will not be easy when you know that the EU and the United States have frozen (defaulted) the equivalent of 300 billion dollars that Russia had placed their debt.

The ECB goes green

The European Central Bank has not only bought sovereign debt in recent years. The debts of the multinationals also benefit from the monetary largesse of Frankfurt.

And surprise, the ECB will now buy the debts of climate-virtuous companies as a priority.

“With regard to purchases of euro zone corporate bonds, the remaining reinvestments will be directed more clearly towards issuers with better environmental performance”said Christine Lagarde.

[Qu’est-ce que les « réinvestissements » ? C’est simple. Dès que certaines dettes arrivent à maturité, la BCE en rachète pour le même montant afin que son bilan ne diminue pas. Toutefois, à partir de mars, l’équivalent de 15 milliards d’euros ne seront plus compensés afin de diminuer le bilan.]

“Without harming the objective of price stability, this approach will support the gradual decarbonisation of corporate bonds held by the ECB, in line with the objectives of the Paris Agreement”she added.

Clearly, borrowing rates will be higher for companies that do not make efforts to reduce their carbon footprint.

However, it is difficult to imagine how depriving ourselves of fossil fuels could reduce inflation. Rather, the opposite has been happening for some time. The bill is salty in Germany where renewable energies have been deployed massively.

Admittedly, the split with Russian energy is abrupt. But we see the same thing in France with a 15% increase in the price of electricity in 2023.

Thus, energy is at the heart of the economy. GDP = Production = Machinery = Energy = Oil (for 94% of transport).

The transition from fossil fuels (80%) to renewable energies is necessary. But it certainly won’t happen without inflation. We are heading for a very inflationary world conducive to Bitcoin.

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