Villeroy Points To Slower Hikes After 2% Hit, Organic B/S Runoff May Start End ‘22 (FT)

In an interview with the FT ECB’s Villeroy “expressed irritation at the idea the ECB risked pushing the economy into recession, saying this “misses the point”. The “predominant” risk was not higher rates, but the energy crisis.”

• “The ECB would continue to “go quickly” until its deposit rate reached 2 per cent — the so-called neutral rate of interest at which it neither stimulates nor restricts the economy — at the end of the year. Any increases beyond that point would be at “a more flexible and slower pace”, he said.”
• “The ECB aims to start shrinking the €9tn balance sheet that ballooned during the pandemic once rates are at neutral. Villeroy said from the end of this year the bank could stop replacing some of the bonds maturing under its €3.26tn asset purchase programme.”
• “The TLtros were designed to encourage lenders to keep lending during the pandemic by providing them with financing at minus 1 per cent. However, rising rates mean lenders are now in line for a risk-free profit of over €25bn.”
• “Shrinking the balance sheet would be handled with care, he said. “Let us start clearly but cautiously, and then accelerate gradually.””
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