ECB could start shrinking balance sheet once rates neutral, Knot says


WASHINGTON (Reuters) – The European Central Bank should consider starting to reduce its oversized stock of assets once interest rates reach a level that neither boosts nor slows economic growth, the chief executive said on Saturday. Dutch Central Bank, Klaas Knot.

The ECB has been raising rates rapidly in recent months and most policymakers see the 0.75% deposit rate reaching that so-called neutral level, somewhere between 1.5% and 2% towards the end of the year.

Knot did not specify an estimate for neutral, but said the rate should hit a range of plausible estimates.

“Once we hit neutral territory with our policy rate, it makes sense to consider rolling off asset purchases with limited reinvestments,” he said in a speech in Washington. “I believe we should move gradually here.”

Such a balance sheet liquidation, also known as quantitative tightening, should initially focus on the 3.3 trillion euros of debt held under the asset purchase program, Knot said, arguing for treatment. different from debt held in a smaller pandemic emergency purchase program.

Rate hikes are unlikely to stall, however, and the ECB will likely have to enter growth-stifling territory.

“I’m increasingly convinced that we need to do more than just remove housing to fulfill our price stability mandate,” Knot said.

While Knot has argued in the past for a large rate hike, likely 75 basis points, on Oct. 27 he said the pace of hikes should eventually slow and the bank should proceed in smaller steps.

“I don’t expect policy rate hikes to come to an abrupt halt,” Knot said. “The further we go and the closer we get to restoring a credible prospect of inflation returning to target, the smaller the rate tiers are likely to become.”

(Reporting by Balazs Koranyi; editing by Philippa Fletcher)


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