ECB’s de Guindos: We Will Start QT ‘For Sure in 2023’; ‘Will Proceed With a Lot of Prudence’

8 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos on Tuesday said that quantitative tightening in the euro area would start next year but would have to be approached cautiously.

In an interview with Politico, de Guindos said of QT that ‘[w]e will start with it sooner or later, for sure in 2023.’

‘This process will have two positive effects: it will reduce excess liquidity and alleviate collateral scarcity’, he said. ‘But quantitative tightening must be implemented with a lot of prudence. In my view, we should start with a passive QT by not fully reinvesting the maturing securities in our portfolio.’

December was the occasion for the Governing Council to discuss the details, he said. QT could or could not occur whilst interest rates were still being normalised, he said.

‘Personally, I don’t see any sort of sequencing here’, he said. ‘The first instrument that we have used, because we believe it to be the most efficient one, is interest rates. QT is also part of the normalisation process of monetary policy and we will proceed with a lot of prudence and caution.’

De Guindos seemed not to want to endorse the view that smaller rate hikes had become more appropriate, observing that core inflation had risen in October.

‘In December we will have new projections about the future evolution of inflation’, he continued. ‘I think we have been underestimating inflation for a long time, which is why it's important to have a much better understanding of inflation dynamics.’

The press conference following the October 27 monetary policy meeting ‘reflected the discussions and the debate that we had in the Governing Council’, he said when asked if the markets had applied a too-dovish interpretation to ECB President Christine Lagarde’s comment.

‘I think our communication was clear’, he said. ‘Afterwards, you have interpretations and market reactions and, in the short term, markets sometimes overreact. However, I think a sort of correction followed the initial immediate reaction.’

Incoming data since September ‘have not been good in terms of growth’, he said. ‘In my view, there is a high probability that quarterly growth in the fourth quarter of this year will be negative. Negative quarter-on-quarter growth is likely to continue in the first quarter of 2023, which means we would face a technical recession. However, I don’t think it is going to be very profound.’

Recovery should set in after the first quarter, but the outlook is ‘extremely difficult’ to evaluate, he said.

The ECB would continue to pursue its price stability mandate, he said. How far this implied hiking depended on ‘the data that we receive, the evolution of inflation, economic conditions, demand, and energy prices’, he said.

The decision at the December monetary policy meeting would be based on the new information available then, he said. Over the coming months, inflation would persist around the current 10.7% level, starting to subside in the first half but with headline and core readings still staying ‘very high’ on average, he said.

Although financial stability had ‘deteriorated quite a lot over the last six months’, he said, ‘the situation of the banks is much more positive now than it was ten years ago.’

The ECB needed to ‘pay special attention to non-bank financial institutions that are less strictly supervised and for which the macroprudential toolkit is more limited.’