Breaking News
Investing Pro 0
🚨 Our Pro Data Reveals the True Winner of Earnings Season Access Data

ECB policymakers hint at slower rate hikes but quicker start to debt run-off

Economy Nov 18, 2022 08:27AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: European Central Bank President Christine Lagarde speaks during economic conference in Riga, Latvia November 3, 2022. REUTERS/Ints Kalnins

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) -The European Central Bank must raise interest rates high enough to dampen growth as it fights sky-high inflation and it could soon start running down its 5 trillion euro ($5.2 trillion) debt pile, three top policymakers said on Friday.

Having raised rates by 200 basis points to fight double-digit inflation, the ECB has been tightening policy at the fastest pace on record and more moves are still in the pipeline, even if some of the comments on Friday suggest a slowdown.

Speaking in quick succession at a major financial conference in Frankfurt, ECB President Christine Lagarde, Bundesbank President Joachim Nagel and Dutch central bank Governor Klaas Knot all made the case for lifting the ECB's 1.5% deposit rate into "restrictive" territory, a level commonly seen as above 2% where the bank puts a brake on growth.

They also argued for the need to start winding down the bank's massive pile of government debt, hoovered up over the past decade when the ECB was still fighting anaemic inflation.

But the comments also contained plenty of nuance, which some saw as signalling a potential compromise between conservatives, who are pushing for rapid tightening, and a small number of policy "doves", mostly from the bloc's southern periphery.

"As the stance of monetary policy tightens further, it will become more likely that the pace of (rate) increases will slow," Knot said in a speech.

A slowdown after back-to-back 75 basis point hikes would not be a surprise given that the ECB already claimed "substantial progress" in policy tightening, but the comments from a key hawk are still likely to temper rate hike expectations.

Nagel meanwhile made the case for beginning the bond run-off at the start of 2023, an earlier date than advocated by most others, suggesting that more modest rate hikes could be coupled with a quicker start of quantitative tightening.

"We should start reducing the size of our bond holdings at the beginning of next year by no longer fully reinvesting all maturing bonds," Nagel said.

TS Lombard analyst Davide Oneglia saw a compromise taking shape focused on the balance sheet run-off, also known at quantitative tightening or QT, even if the ECB is set to maintain its bias for overtightening.

"The 'grand bargain' between hawks and doves in the ECB Governing Council is shaping up ahead of the December meeting, which could mean slower hikes in exchange for earlier and/or faster QT," he said.

Knot also advocated a quick start to the debt run off, arguing that it would cut inflation and lower the required peak interest rate to control price growth.

Still, ECB chief Lagarde said rates will remain the ECB's primary policy tool and the balance sheet run off is more likely to take place in the background.

"Acknowledging that interest rates remain the most effective tool for shaping our policy stance, it is appropriate that the balance sheet is normalised in a measured and predictable way," she said.

Reinforcing views that quantitative tightening would be on auto pilot, Knot said it should be as predictable and boring as "watching paint dry."

The ECB has little experience with the effect of reducing its balance sheet, which is just shy of 9 trillion euros.

It raised funding costs for banks last month, hoping lenders would start paying back multi-year loans, called Targeted Longer-Term Refinancing Operations.

However, in the first repayment possibility under the new terms, only 296 billion or 14% of such loans were repaid, far below the roughly 500 billion expected by markets, suggesting that balance sheet action is more unpredictable than rate moves.

($1 = 0.9664 euros)

ECB policymakers hint at slower rate hikes but quicker start to debt run-off
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email