Speech in New York: ECB councilor Villeroy outlines ECB balance sheet reduction

At speech in New York
Villeroy, member of the Governing Council of the ECB, outlines the run-down of the ECB balance sheet

The ECB’s balance sheet has grown to nearly €9 trillion as a result of billions in bond-buying programs in recent years. According to the French head of the central bank, Villeroy, the cut should not be delayed too long, but the interest rate level must first be addressed.

According to the French head of the central bank, Francois Villeroy de Galhau, the ECB will soon have to tackle the issue of shrinking its balance sheet, which has been expanded by years of bond purchases. Once interest rates have reached the so-called neutral level, which does not warm up or slow down an economy, the reduction in bond holdings cannot be delayed too long, the Governing Council member of the European Central Bank (ECB) said at an event on Monday. Columbia University in New York.

Villeroy reiterated his earlier estimate that the neutral interest rate was just below two percent and would be reached before the end of this year. Once the interest rate level is neutral, banks must first repay the money from the ECB’s large multi-year loan salvos – known in the art as TLTRO – Villeroy said.

“TLTRO’s repayment comes first and we must avoid unintended incentives for banks to delay repayments,” he explained. Thereafter, the balance sheet reduction could be initiated as maturing bonds from the previous APP purchase program are no longer fully replaced. “We could start here earlier than 2024 by holding on to reinvestments in part, but at a gradually reduced pace.”

Be careful when reducing bond holdings in the beginning

The ECB’s balance sheet has now grown to nearly €9 trillion as a result of billions in bond-buying programs in recent years. From Villeroy’s point of view, the reduction in bond positions should start rather cautiously at first. “Starting slow, evaluating market reactions and accelerating gradually seems like a sensible approach,” said the French central bank governor.

The ECB’s 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 mention a timeline for this.

Villeroy kept a low profile on the level of a further rate hike at the ECB meeting on October 27. Given the fluctuating financial markets, the discussion of whether this should increase by 0.50 or 0.75 percentage point is premature. In the fight against high inflation, the ECB recently raised its bank deposit rate to 0.75 percent and announced further hikes.

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