At the speech in New York
Villeroy, a member of the Governing Council of the ECB, outlines a reduction in the ECB’s budget
12/10/2022 1:09
The ECB’s balance sheet has risen to nearly nine trillion euros as a result of billions of bond buying programs in recent years. According to Villeroy, head of the French central bank, the reduction should not be delayed too long, but first the level of interest rates must be addressed.
According to the head of the French central bank, Francois Villeroy de Galhau, the ECB will soon have to deal with 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 warms nor slows down an economy, the reduction in bond holdings cannot be delayed for too long, said the member of the Governing Council of the European Central Bank (ECB). in an event at Columbia University in New York.
Villeroy reiterated his earlier assessment that the neutral interest rate level was just under two per cent and would be reached by the end of this year. Once interest rates have reached neutrality, banks should first repay funds from the ECB’s large multi-year loans – known in the art as TLTROs – Villeroy said.
“The repayment of TLTRO comes first and we should avoid unintended incentives for banks to delay repayments,” he explained. Subsequently, the budget reduction could be triggered by the fact that the maturing bonds from the previous APP purchase program are no longer completely replaced. “Here we could start before 2024 with a partial focus on reinvestments, but at a gradually reduced pace.”
Be careful when reducing bond holdings at first
The ECB’s balance sheet has now risen to nearly nine trillion euros as a result of billions of bond buying programs in recent years. From Villeroy’s point of view, the reduction in bond holdings should start with some caution initially. “Starting slowly, assessing market reactions and gradually accelerating them seems a sensible approach,” said the governor of the French central bank.
The monetary authorities of the ECB recently discussed the issue of future budget cuts at their meeting in Cyprus. Last week, Bundesbank President Joachim Nagel came out in favor of reducing bond holdings. He hasn’t indicated a timeline for this.
Villeroy kept a low profile on the level of a further hike in interest rates at the ECB meeting on 27 October. In light of the fluctuations in the financial markets, the discussion of whether it should rise by 0.50 or 0.75 percentage points is premature. In the fight against high inflation, the ECB recently raised the interest rate on bank deposits to 0.75 percent and announced further increases.
