The European Central Bank should speed up the reduction of its balance sheet and could stop reinvesting cash from debt maturing in its largest bond buying scheme to complement further interest rate hikes, Belgian policymaker Pierre Wunsch said
Fighting stubborn inflation, the ECB has raised rates at its fastest pace on record and has been shrinking its bloated balance sheet, all in the hope that more expensive borrowing will thwart demand and curb inflation.
The ECB is now allowing 15 billion euros worth of debt per month to expire in its 3.2 trillion euro Asset Purchase Programme, and Wunsch argued that this process has gone well so far.Wunsch, among the first last year to recognise Europe's inflation problem, also said the ECB needed to keep raising interest rates and the market's expectation for another 75 basis points of increases was "reasonable," but expectations of a rate cut around the turn of the year were not.
Markets now see the ECB raising its 3% deposit rate to 3.75% by September, but then expect some reversal, contrary to the ECB's guidance that once rates peak, they would stay at that level for a while. The euro zone's biggest problem now is that underlying inflation is still rising and appears to be defying all expectations, suggesting that the ECB does not fully understand these price dynamics.
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