The European Central Bank (ECB) should wind down net bond buying in the summer, while giving itself more flexibility on the timetable for any subsequent interest rate increase, Governing Council member Peter Kazimir said in an interview on Thursday.
The Slovak central bank chief said the tool — which was created to stave off deflation after Europe’s debt crisis and was expanded during the COVID-19 pandemic — has outlived its usefulness.
The ECB does not have a firm end date for its asset purchase program.
“The risks this instrument was designed to address have subsided, while on the other hand the negative side effects are becoming more significant,” Kazimir said. “Trading activity weakens in August so that would be a good natural timing for ending the program.”
Facing unprecedented eurozone inflation, ECB officials have fallen into agreement on the need to pare back support measures that include record-low interest rates and a second bond-buying program deployed when COVID-19 struck and is due to end next month. Where they differ is on the speed at which the shift should happen.
Kazimir’s proposal for ending the program is the most specific since ECB President Christine Lagarde signaled a tougher stance to soaring prices this month. His timing chimes with Bank of France Governor Francois Villeroy de Galhau, who this week said that purchases could finish in the third quarter.
Both officials suggest a change to the ECB’s forward guidance that currently calls for interest rates to rise “shortly” after asset purchases are concluded.
Doing so would provide more “optionality,” Villeroy said.
“It’s time to start thinking about separating the two,” Kazimir said. “Phasing out asset purchases should free our hands and give us room to find the most appropriate timing for returning to rates as the standard monetary-policy tool.”
Other officials have urged caution in reacting to inflation that many economists still predict would come in below the ECB’s 2 percent target in the next two years. Bank of Spain Governor Pablo Hernandez de Cos on Thursday said he saw “no reason to overreact.”
ECB chief economist Philip Lane echoed that line later on, while also saying the ECB should not tolerate underreactions to emerging inflation risks.
By contrast, other Governing Council members are keener to follow the Bank of England and the US Federal Reserve in raising rates. They include Germany’s Joachim Nagel and the Netherlands’ Klaas Knot, who have floated the idea of a hike as soon as this year.
Investors are betting on two quarter-point increases by the end of this year, although Bank of Latvia Governor Martins Kazaks said in an interview this week that such a scenario is “somewhat too harsh.”
Liftoff is nevertheless “quite likely” this year, he added
The challenge for policymakers is that inflation is being driven by factors including high energy prices and supply-chain bottlenecks that have lasted longer than initially thought.
While the pressure is still expected to ease, unpredictable events, such as tensions between Russia and the West over Ukraine, are muddying the outlook.
“Our roadmap toward monetary tightening still has some blank points that represent risks, and we’ll need more data that will decide whether or not a rate increase will be needed already this year,” Kazimir said. “I have no doubts that we’re headed toward monetary tightening, but I’d advocate for a path of gradual steps.”
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