Christine Lagarde said that the European Central Bank will consider shrinking its balance sheet only once it has completed the normalization of interest rates.
The European Central Bank President told lawmakers in Brussels Monday that it was the most appropriate and effective way to combat record high euro-area inflation.
That suggests that only once rates have reached the so-called neutral level where they are neither stimulative nor restrictive, will the Governing Council address what it will do with trillions of euros of debt the Eurosystem holds.
When we have completed our monetary policy normalization, using the most appropriate, efficient and effective tool, the interest rates, we will ask ourselves: how, when, at what rhythm, at which pace we use the other monetary tools we have available, including quantitative tightening, Lagarde said. In due course, that will take place in due time, once we have completed the normalization process, and exhausting the benefit of what we regard as the most appropriate tool at the moment. The comments jar with comments by Bundesbank President Joachim Nagel last week that the ECB needs to start shrinking its bonds bought during recent crises.
He said Friday that our special measures need to be resolved quickly once they have fulfilled their purpose - that means I am clearly for a reduction of our balance sheet in Lucerne, Switzerland. A phase of high inflation that we have to hike rates just doesn't mesh with a huge portfolio of asset-purchase programs. Reducing the almost 5 trillion euro $4.8 trillion of bonds bought by the ECB during recent crises is expected to be discussed on October 5 at an official non-policy meeting in Cyprus and will likely be debated at subsequent gatherings, people familiar with the matter told Bloomberg.
The ECB raised its deposit rate to 0.75% earlier this month, and traders expect another such step in October. That puts borrowing into the range of what some economists think is neutral territory. Francois Villeroy de Galhau, a Governing Council member, sees it at below or close to 2%.
The ECB chief didn't want to say where that level might be.
What we want to do is to reach the point where monetary policy is neither stimulating, nor tightening that economists call the neutral rate, and we are not there, she said. When we get there we have to determine whether we reach our target of 2% in the medium term. If we don't, we might have to take further measures. None of this is what life s like in the world's Strictest Covid Zero City.