At speech in New York
ECB Governing Council member Villeroy outlines ECB balance sheet reduction
10/12/2022 1:09 am
The ECB’s balance sheet has swelled to almost nine trillion euros as a result of the billions in bond purchase programs in recent years. According to France’s head of the central bank, Villeroy, the reduction should not be delayed for too long, but the interest rate level must be tackled first.
According to France’s head of the central bank, Francois Villeroy de Galhau, the ECB will soon have to address the issue of reducing its balance sheet, which has been expanded by years of bond purchases. Once interest rates have reached the so-called neutral level, which neither heats up nor slows down an economy, the reduction in bond holdings cannot be delayed for too long, said the Governing Council member of the European Central Bank (ECB) at an event at Columbia University in New York.
Villeroy reiterated his earlier assessment that the neutral interest rate level was just under two percent and would be reached before the end of this year. Once the interest rate level has reached neutral, banks should then first repay the funds from the ECB’s large multi-year loan salvos – known in the art as TLTRO – said Villeroy.
“TLTRO’s refund comes first, and we should avoid any unintended incentives for banks to delay refunds,” he explained. After that, the balance sheet reduction could be initiated by the fact that expiring bonds from the earlier APP purchase program are no longer completely replaced. “Here we could start earlier than 2024 by partially sticking to reinvestments, but at a gradually reduced pace.”
Use caution when reducing bond holdings at first
The ECB’s balance sheet has now swelled to almost nine trillion euros as a result of the billions in bond purchase programs in recent years. From Villeroy’s point of view, the reduction in bond holdings should initially begin rather cautiously. “Starting slowly, evaluating market reactions and gradually accelerating them seems a sensible approach,” said France’s central bank governor.
The ECB monetary authorities recently discussed the issue of future balance sheet reductions at their meeting in Cyprus. Last week, Bundesbank President Joachim Nagel spoke out in favor of reducing bond holdings. He did not name a timeline for this.
Villeroy kept a low profile on the level of a further interest rate hike at the ECB meeting on October 27th. In view of the fluctuating financial markets, the discussion as to whether it should go up by 0.50 or 0.75 percentage points is premature. In the fight against high inflation, the ECB recently raised its interest rate for bank deposits to 0.75 percent and announced further increases.