According to Vice President Luis de Guindos, the European Central Bank should be able to phase out asset purchases in July to pave the way for a rate hike as early as this month.
Any decision will depend on the ECB’s economic forecasts at its next monetary policy meeting in June, although it’s already “crystal clear” that higher inflation and slower growth will be part of the mix, Guindos said in a Bloomberg interview.
He calculated the possibility of a recession and stagflation in the euro zone.
“I see no reason why we shouldn’t end our asset purchase program in July,” Guindos said.
“For the first rate hike, we need to see our projections, the different scenarios,” but “from today’s perspective, July is possible and also September or later. We will look at the data and only then decide.”
The Governing Council has been moving towards a rollback of crisis-era stimulus for months, and last week reiterated plans to move forward despite heightened uncertainty about the economic fallout from the war in Ukraine.
Traders see a 75 percent chance of a quarter point move in July and expect the deposit rate to hit zero by October.
Guindos argued that monitoring inflation expectations and wage growth will be crucial to get it right.
“If we start to see an unanchoring of inflation expectations and second-round effects, then that will be a key element for the future of monetary policy,” he said. “The Governing Council looks at this data at every meeting.”
Inflation in the 19-nation euro area hit 7.5 percent last month and Guindos predicted it was “closer to the peak”. Even if price pressure eases in the second half, he doesn’t expect the overall rate to fall below 4 percent this year.
Guindos’ Belgian counterpart, Pierre Wunsch, said in a separate Bloomberg interview that the ECB could raise interest rates to above zero before the end of the year, with July being a possible start date for rate hikes.
Latvia’s Martins Kazaks told Bloomberg a rate hike in July was “possible” and there was “no reason” to disagree with markets’ prices for the rest of the year.
Her German colleague Joachim Nagel is also planning to start this summer.
For the ECB, the end of monetary accommodation means walking a fine line. The deposit rate has been negative for nearly eight years and bond markets have enjoyed almost continuous support from large-scale asset purchases for much of that time.
The prospect of heavily indebted countries in the south of the euro area losing that support as bond issuance surges to fund energy independence and defense investments has raised the specter of a new debt crisis.
Bloomberg reported earlier this month that ECB officials are working on a backstop that can be used against market stress.
Guindos warned that “any decision taken to limit fragmentation should not affect our monetary policy stance”.
He added that the ECB has “some tools” to address this issue, although the Governing Council has “not discussed a new anti-fragmentation program in detail.”
For now, policymakers are determined to flexibly reinvest maturing bonds bought under their pandemic program to keep yields and spreads under control. Extending this flexibility to the ECB’s regular purchase program is not an option, Guindos said.
“We saw a slight widening in spreads for Italy, Spain or Portugal,” he said. “But fragmentation has been contained.”
https://www.independent.ie/business/world/ecbs-guindos-sees-qe-ending-in-july-paving-way-for-rate-hike-41572946.html ECB’s Guindos sees quantitative easing end in July, paving the way for a rate hike