The ECB is likely to enter an interest rate range that will dampen economic activity, said ECB President Christine Lagarde and later the central bank heads of Germany and the Netherlands, Joachim Nagel and Klaas Knot, on Friday at the European Banking Congress in Frankfurt .
Economists currently place this restrictive interest rate level at over two percent for the deposit rate. The rate that financial institutions receive from the central bank for parking excess funds is currently 1.5 percent.
“We expect to keep raising rates – and removing stimulus may not be enough,” Lagarde said. How far the ECB goes on its tightening path and at what pace will be determined by the inflation outlook, she said. The ECB will ensure that excessive inflation is not reflected in inflation expectations. Fueled by the surge in energy prices, inflation in the euro area is now in double digits. In October it was 10.6 percent – the highest level since the euro was introduced in 1999.
In the fight against the ongoing surge in inflation, the ECB has already raised interest rates three times within a few months by a total of 2.0 percentage points. In September and October, it even raised the key rates by a particularly strong 0.75 percentage points. “Even after the interest rate hikes, the relevant key interest rate is still in the expansive area,” said Bundesbank President Nagel. It would be wrong to wait for further decisive steps for fear of a downturn.
From the point of view of his Council colleague Knot, the ECB will soon reach a neutral level on its rate hike course, which will no longer stimulate the economy. Knot expects the interest rate decision to be ready at the next meeting in December. “Then we will no longer stimulate economic growth, but we will not slow it down either,” he said. But this is only “halfway”.
According to Knot, however, the pace of interest rate hikes may then slow down. “As policy stance continues to tighten, the pace of expansion becomes more likely to slow.” In his view, the ECB must now quickly address the issue of reducing the balance sheet. The central bank balance sheet of the ECB has swelled to almost 9 trillion euros in the course of years of massive bond purchases.
In the professional world, reducing total assets by reducing bond holdings is referred to as quantitative tightening. At the conference, Deutsche Bundesbank President Nagel called for this to start at the beginning of next year. “In my opinion, early next year we should start reducing the size of our bond holdings by no longer fully reinvesting all maturing bonds,” he said.
In December, the ECB wants to make important decisions on reducing its balance sheet, as Lagarde said. The euro central bank is initially keeping an eye on the bond holdings from the older APP bond purchase program, with which it wanted to boost the economy and inflation from 2015 onwards. The ECB wants to continue with the flexible reinvestments in the PEPP pandemic purchase program, as Lagarde said. For this purchase program, the ECB has so far promised that expiring bonds will be completely replaced by at least the end of 2024. Lagarde advocated proceeding cautiously with the balance sheet reduction. It is appropriate to normalize central bank balance sheets in a measured and predictable manner, she said at the conference. The next interest rate meeting of the monetary watchdogs – which will also be the last this year – is scheduled for December 15th.
Source: Nachrichten
