MNI BRIEF: ECB Needs Balance Sheet Cut To Fight Inflation-Knot

The ECB’s balance sheet is expected to be a "key feature" of monetary policy normalisation later in the year, as policymakers act “forcefully” to tame high and persistent inflation, Klaas Knot, the governor of the Netherlands’ central bank said Tuesday.

Whether or not to continue with the reinvestment of maturing bond buys under the APP likely to be discussed, he said, along with the issue of renumerations on reserve holdings as the key deposit rate moves into positive territory, Knot said, putting at least the idea of early stage ECB QT in play for the not too distant future. adding that the Governing Council asked ECB committees to explore options back in July and will likely hear back in Sept or October -- and the outcome will be a key watch for the shorter end of the euro yield curve.

Knot, a known hawk, said he was leaning towards a 75bps rather than a 50bps hike next week, but had not yet made up his mind. With core inflation yet to peak, a growth slowdown is unlikely to bring inflation back to target on its own, he said, citing better-than-expected GDP growth in previous quarters as reason to think the euro area economy will remain resilient.