Exclusive: ECB Still Likely Far from Ready to Discuss QT, But Topic Could Come up Sooner Than Expected
26 May 2022
- ECB insider: Must see other jurisdictions’ QT experience, so ECB hawks not yet pushing the issue
- ECB insider: QT is ‘one of the optionalities that we have if there is a need to start it earlier’
- ECB insider: ‘Things are moving so fast that I wouldn’t be surprised at being surprised’ on QT
By David Barwick – FRANKFURT (Econostream) – European Central Bank insiders, even those of a more hawkish bent, generally consider the Governing Council unlikely to put the topic of quantitative tightening on its agenda this year, but - having been surprised by the pace at which other monetary policy developments have occurred - do not all rule out that the topic would come up sooner than expected.
Priority number one is dealing with interest rates, according to a relatively conservative Council member, one of five ECB insiders to speak to Econostream on the subject of QT. Before that occurs - meaning whatever number of rate hikes is possible by the end of this year - a ‘major discussion’ about drawing down the ECB’s balance sheet was less likely, he said.
‘Given that we lack first-hand experience in this area, we’re all looking very carefully at what happens in the UK and the US’ in this respect, he elaborated. For this reason, even ECB hawks are not inclined to push the issue too hard, he said.
If the other jurisdictions encounter no problems in their quantitative tightening, that still wouldn’t guarantee the ECB's success, he said. ‘But if it doesn’t work there, then of course that would create some second thoughts about how we should approach it’, he said.
Various insiders were quick to observe that the ECB had, as a second insider expressed it, ‘promises out there’ to be mindful of in the sense of a specified policy withdrawal sequence before embarking on QT.
‘And probably you need to hike quite some, you need interest rates to normalise a bit first’, this particular person also noted. ‘But let’s see. That’s one of the optionalities that we have if there is a need to start it earlier than we have communicated.’
A third insider agreed that it was ‘way too early’ at the moment, while being quick to sound a note of caution. ‘Things are moving so fast that I wouldn’t be surprised at being surprised if they start to discuss it sooner than expected’, he said. ‘But I don’t think it will happen before the end of the year.’
On reflection, however, he deemed it conceivable that some of the more hawkish members might not wait that much longer to at least raise the issue.
‘Some of them will want to start framing the discussion’, he said. ‘I think they won’t have expectations of succeeding in September, October or December, but they will still want to start framing the discussion.’
A fourth person who in principle would be relatively amenable to discussing QT suggested that it was too early, because ‘in some jurisdictions they worry that when the rate tightening cycle begins, it can cause some problems on the sovereign bond markets for them, so they would like maybe a kind of new facility to be prepared in order to buy bonds if necessary, so we are on that side of the debate and not on the QT side of the debate.’
A fifth person concurred that it was very early for QT and said ‘we probably need to honour’ the ECB’s forward guidance regarding reinvestment of maturing assets first. In any case, he added, quantitative tightening was ‘not an acute problem, because it’s not like by doing that we can reduce inflation.’
He assessed the probability of a need to discuss QT this year as ‘very low’.
Still, Econostream is not inclined to attach much significance to the fact that Dutch National Bank Governor Klaas Knot yesterday downplayed the probability of QT being discussed this year.
For one thing, Knot, one of the most hawkish members of the Governing Council, has a certain interest at the moment in harmony among monetary policymakers. Most likely one of the various national central bank governors ECB President Christine Lagarde consulted before she on Monday publicised surprisingly explicit and - for her - somewhat hawkish monetary policy plans for next quarter, Knot now wants to see the Council follow through. As such, and unsurprisingly, he endorsed her statement and was not disposed to throw a spanner into the works by suggesting QT be discussed at this early stage.
Moreover, Knot already went out on a limb just last week when he floated the potential need for the ECB to consider an outsized interest rate step. He was thus the first Governing Council member to do so publicly, and following on the heels of that initiative, urging a discussion of QT at the current more delicate juncture would be a bit much.
In any case, we recall that Knot's 50-bp idea last week came just three months after he had advocated interest rate moves of the usual size, observing on February 6 that ‘normally we take interest rate steps of 25 basis points ... and I have no reason to suppose that we will take any other step than that.’
We can thus easily imagine that towards the end of this year, Knot, provided the data play along, will see no reason not to push the envelope again and position himself at the forefront of those ready to discuss QT, regardless of what was said back in May in the interest of pre-hiking Eurotower harmony.