(Bloomberg) — The European Central Bank should weigh all available options when discussing how to shrink its balance sheet more quickly — even after the latest bond-market rout in Italy, according to Governing Council member Bostjan Vasle.
(Bloomberg) — The European Central Bank should weigh all available options when discussing how to shrink its balance sheet more quickly — even after the latest bond-market rout in Italy, according to Governing Council member Bostjan Vasle.
“I’m in favor of starting debate on next steps regarding QT,” the Slovenian official said in an interview in Marrakech, where he’s attending meetings of the International Monetary Fund. “There are several options, which must be put on the table.”
Since interest rates were hiked for a 10th straight time last month to what many now see as the peak, attention has shifted to whether faster QT may be appropriate. Views among the Governing Council’s 26 members are diverging, however, and the negative reaction by investors to Italy’s budget plans is a further complication.
Vasle signaled he may be more inclined to consider selling bonds purchased under the ECB’s older APP program than calling an early end to reinvestments under the Covid-era PEPP portfolio.
“The current situation in the bond market is a reminder that PEPP, and the flexible reinvestment policy that comes with it, is important,” he said, adding that on the APP “the advantages and disadvantages of a faster reduction of the program must be carefully evaluated.”
Rising bond yields suggest that market “participants are realizing that the ECB is more or less done with interest rates increases, and expectations for a longer period of higher interest rates is starting to be reflected,” he said.
Other Governing Council members are keeping a close eye on markets, too — especially on Italy.
But while Gabriel Makhlouf said the country’s yield spread over peers will keep officials on alert, Pierre Wunsch said such moves shouldn’t influence talks on whether to halt PEPP reinvestments before the planned end-2024 cutoff, and Boris Vujcic said there’s no need now to deploy the ECB’s crisis tool.
Turning to fiscal policy, Vasle urged governments to take more targeted and measured action.
“Monetary policy response to elevated inflation was strong — we changed our course completely,” he said. “One can’t say the same about fiscal policy, which remains expansionary for a fourth straight year.”
The fact that budgets for 2024 aren’t yet finalized is one reason consumer prices could yet surprise on the upside.
Inflation “is coming down, but uncertainty surrounding the outlook remains high, also for the next year,” said Vasle, who judges risks as “balanced.”
“On the upside they include geopolitical tensions and their consequences on energy prices, still strong labour markets and fiscal policy,” he said. “At the same time there’s a risk that inflation comes down faster than we currently expect, especially if our economies slow down faster and transmission works faster.”
The ECB currently sees price gains returning to 2% in the second half of 2025.
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