Fri, Apr 22, 2022 page10

• ECB vice president says asset purchases could end in July, with rate hike likely

  • Bloomberg
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  The European Central Bank (ECB) should be able to phase out asset purchases in July to pave the way for an interest-rate increase early in the month, ECB Vice President Luis de Guindos said.

  A decision hinges on the ECB’s economic forecasts at its June policy meeting, although it is “crystal clear” that higher inflation and lower growth are to be part of the mix, De Guindos said.

  He discounted the chance of a recession and stagflation in the eurozone.

  “I see no reason why we should not discontinue our asset purchase program in July,” De Guindos said.

  “For the first rate hike, we will have to see our projections, the different scenarios,” he said. “From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide.”

  The ECB’s Governing Council has moved toward unwinding stimulus for months and last week reiterated plans to press ahead, despite heightened uncertainty about the economic implications of Russia’s invasion of Ukraine.

  Traders estimate a 75 percent chance of a one-quarter point move in July, and are bracing for the deposit rate to reach zero by October.

  De Guindos said that monitoring inflation expectations and wage growth are crucial to the balance.

  “If we observe a de-anchoring of inflation expectations and second-round effects, then this is going to be a key element for the future of monetary policy,” he said. “The Governing Council looks at these data at every meeting.”

  Inflation in the eurozone last month hit 7.5 percent, and De Guindos predicted that it is getting “closer to the peak.”

  Although price pressures should start to ease in the second half, he said he did not expect the headline rate to fall below 4 percent this year.

  De Guindos’ Belgian colleague, Pierre Wunsch, said that the ECB could lift policy rates above zero before the end of the year, prompting traders to bet on three quarter-point hikes from the ECB this year.

  Wunsch estimates July as a potential start date for rate increases.

  Central Bank of Latvia Governor Martins Kazaks said that a rate hike in July is “possible,” while his German counterpart, Joachim Nagel, is also among those predicting an increase this summer.

  For the ECB, removing policy accommodation means treading a fine line. Its key deposit rate has been negative for nearly eight years, and bond markets have enjoyed almost uninterrupted support in the form of large-scale asset purchases for much of that time.

  The prospect of highly indebted countries in the eurozone’s south losing that support, at a time when bond issuance is rising to fund investments in energy independence and defense, has raised the specter of a new debt crisis.

  “Any decision taken to limit fragmentation should not interfere with our monetary policy stance,” De Guindos said, adding that the ECB has “some instruments” to address this problem.

  Policymakers are determined to reinvest maturing bonds purchased under their COVID-19 program to keep yields and spreads under control.

  Extending this flexibility to the ECB’s regular purchase scheme is not an option, De Guindos said.

  “We have seen a little widening of spreads for Italy, Spain or Portugal, but fragmentation has been contained,” he said.
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