ECB’s Scicluna: Balance Sheet Reduction to Be Predictable and Gradual

2 December 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank's effort to reduce the size of its balance sheet would be 'predictable and gradual', ECB Governing Council member Edward Scicluna said Friday.

In a speech at the Institute of Financial Services Malta's annual dinner, published late Friday by the Central Bank of Malta, which he heads, Scicluna said that ‘supply bottlenecks have started to dissipate’ but that ‘inflation has remained elevated’ nonetheless.

The ECB has ‘made significant progress in withdrawing monetary accommodation’, he said. Whilst ‘interest rates are expected to be the main tool for adjusting the stance’, he continued, ‘to achieve our objective of anchoring inflationary expectations close to 2% rate normalisation needs to be complemented with balance sheet normalisation.’

Balance sheet normalisation ‘is expected to be pursued in a predictable and gradual manner’ and ‘will undoubtedly change the financing environment which borrowers have grown accustomed to’, he said, citing the impact on money markets and sovereign debt, with that on bank and corporate debt to follow.

‘Indeed, euro area sovereign yields have already risen markedly since last year and could increase further when balance sheet normalisation starts’, he added.

Scicluna, offering ‘some recent positive news to cheer us up for Christmas’, noted the decline in euro area inflation last month and that ‘[s]ome say it might have peaked.’

‘Gas and oil prices are on the decline’, he continued. ‘Trasfigura, a respected authority on gas reserves, tells us that the gas crisis has abated not just for this winter but quite possibly the next.’

‘The much expected recession at the end of this year might not materialise after all’, he said. ‘So ....... the ECB will no longer continue raising interest rates.? Well ....not quite.’