Eurozone - € LIQUIDITY CORNER

ECB EXCESS LIQUIDITY PROJECTION

?PEPP & APP Projection

On January 8, the ECB released its projection for the PEPP program monthly redemptions for 2025 and 2026. The ECB no longer reinvests any part of the Pandemic Emergency Purchase Program.

The European Central bank already released the monthly redemption schedule for the APP (Asset Purchase Program) until July 2026.

When combining the two redemption schedules, we can easily see the heavy redemption months: February, March April, October 2025, February 2026 and April 2026.

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Autonomous factors – GGA and “Item 6” on the liabilities side

The autonomous factors affecting excess liquidity include the Government General Account (GGA) and the liabilities to non-Euro Area residents denominated in euros, referred to as “Item 6”. Both these factors are currently at historically low levels.

At the start of 2025, the GGA was at its lowest level for this time of year since 2016, and the "Item 6" was at its lowest since 2017.

Both increased in the last week of January, as shown in the ECB balance sheet update as of January 31.

The GGA, at €130.8bn, remains below pre-pandemic levels..

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the "Item 6" has risen above €200bn (€201.65bn) but is still below the levels seen from 2018 to early 2020.

With the increase in GGA and Item 6 in the week ending January 31 excess liquidity and base money fell by ~ -€75.4bn for the week.

As highlighted previously for the US Federal Reserve, with the low Reverse Repo for the Fed, the stock of reserve as dried out. (see comments here).

Similarly there are currently only a very limited excess liquidity reservoir within the autonomous factors, unlike the situation in early 2023 when "Item 6" was at €538bn and the GGA at €440bn, or even early 2024 with "Item 6" at €282bn and GGA at €213bn

Cyclicality

?Year-over-year comparison charts show seasonality for both autonomous factors.

They typically spike, withdrawing excess liquidity, in the second half of March. Item 6 also spikes in June, October, and December (end of quarter), while the GGA shows more monthly cyclicality.

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?In summary, the combination of the APP and PEPP redemptions and the cyclical tightness stemming from the Government General Account and euro-denominated liabilities to non-residents will likely result in reduced excess liquidity at the end of March. The potential for a sharper increase in GGA and Item 6 is greater due to their current low levels.

We also expect tighter reserves at the Fed around the same period: late March, with the expected lifting of the debt limit, and mid-April with tax payments. (see also our 2025 Reversal comment)?

This scenario could lead to some valuation excess being removed and may prompt central banks to review their quantitative tightening strategies but more likely inject some liquidity into the front end, similar to what the Fed did in September 2019.

Longer term projection

With the new PEPP redemption schedule, even assuming unchanged Item 6 and GGA, we anticipate reaching the €2.5tn excess liquidity threshold by the end of September 2025 and crossing the €2tn threshold by the end of July or early August 2026.

Central banks are expected to maintain bond portfolios on their balance sheets at a much higher level than in the pre-pandemic era, expected to remain as high as €2tn for the ECB). Higher government borrowing needs, will only encourage keep such stock on balance sheet, but it will also keep a simmering inflation risk alive,

As highlighted in the