WASHINGTON (Reuters) – The European Central Bank (ECB) will have to consider starting to reduce its balance sheet, bloated by years of massive asset purchases, once it reaches the “neutral rate”, the one that does not stimulate nor is it holding back the economy, Klaas Knot, a member of the board of governors of the Frankfurt institute, said on Saturday.
The ECB has purchased more than 5 trillion in government and corporate bonds over the past ten years in an effort to keep interest rates low and boost inflation. But since July, it has started to raise interest rates with two hikes of 150 basis points in total while another increase in the cost of credit of 75 basis points is expected this month.
Most observers believe that the neutral rate is between 1.5% and 2%, a level that could be reached towards the end of the year when the main key rate of the ECB is currently at 0.75%.
“Once we reach neutral territory with our policy rate, it makes sense to consider a ‘roll-off’ (mitigation) of asset purchases by limiting reinvestments,” he said in a speech. pronounced in Washington where meetings of the International Monetary Fund (IMF) are held.
“I believe that we should gradually move forward on this subject,” he added.
The reduction in the central bank’s bond portfolio, known as quantitative tightening (“quantitative tightening” or QT), should initially focus on the 3.3 trillion euros of debt held under the asset purchase program , said Klaas Knot.
The governor of the Dutch central bank wants differential treatment for the smaller emergency purchase program implemented during the COVID-19 pandemic.
(Report Balazs Koranyi; French version Claude Chendjou)
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