When the ECB expanded its asset purchase programme to include sovereign bonds in 2015 policymakers went to great lengths to explain that this wasn't monetary financing, and that this programme therefore didn't violate the Treaty on the Functioning of the European Union, which explicitly prohibits the monetary financing of sovereign debt. Policymakers said they would not participate in the primary market, and they promised that the purchases would be temporary. Pinky swear!
Yesterday, Philip Lane addressed a conference on the topic of central bank liquidity. The ECB's Chief Economist concluded that "a durable level of central bank reserves is likely required," even if that level is significantly lower than the current amount of liquidity. And the supply of reserves should be able to respond quickly in the event of financial stress. Few economists will disagree.
But Lane continued, "in view of the trade-offs posed by each individual instrument, it seems proportionate from a macroeconomic perspective for a central bank to use a range of instruments to provide central bank reserves." Main refinancing operations and the marginal lending facility –the ECB's standard instruments– can offer the flexibility needed to respond to shocks but it arguably does not create a very solid level of reserves (although operations can easily be rolled over). Lane added that "a mix of a structural bond portfolio and longer-term refinancing operations would provide longer-time liquidity to the banking system" (emphasis ours).
Yes, you read that correctly. He essentially suggests that the ECB could permanently hold (part of) the APP and/or PEPP purchases on the balance sheet. This can only be achieved by replacing maturing assets as soon as the portfolio size falls below a certain threshold. So much for temporary? And hello again Karlsruhe? It seems like ECB officials have also prepared for legal challenges already, seeing that Lane explicitly refers to the "proportionality" of such a structural portfolio.