ECB’s Villeroy: Will Probably Accelerate Balance Sheet Reduction from July

16 December 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Friday said that the ECB would probably step up the speed with which it reduces the size of its balance sheet as of July.

In an interview with French business news channel BFM Business, Villeroy, who heads Banque de France, said that the €15 billion per month of maturing securities that the ECB would no longer reinvest as of March was a ‘significant’ amount.

‘We said we would reassess in June, and probably we will amplify the reduction from July’, he said.

Thursday’s 50bp rate hike took the ECB’s deposit facility rate to 200bp, ‘which I had estimated to be the neutral rate’, he said. As to how many more such hikes would follow, Villeroy said that ‘one should not already speculate on the number of increases of 50bp that there will be.’

‘There will probably be several, but we will remain guided by real data: pragmatism!’, he added.

Villeroy maintained that ‘it is too early, clearly too early, to determine what is called the terminal rate … we will be driven by the real data.’

The deceleration of the tightening pace from 75bp to 50bp was appropriate, ‘because I think it was important to properly proportion the doses and better assess the effects’, he said. ‘But we also said we would raise rates as high and as long as necessary, again to win this game.’

Not everyone on the Governing Council agreed with the outcome, he said, conceding that ‘there were discussions’ on the decision to slow the pace of rate hikes in particular.That said, it was a large majority, and I believe it was a good-quality and peaceful discussion’, he said.

Inflation would peak in France and the Eurozone in general in the first half of 2023, following which it would ‘decline steadily’, he said. ‘But what we are saying is that we will stay in action, we will do what it takes to get back towards 2%. We are not going to content ourselves with a partial drop, with inflation that remains at 4.5%, levels that are too high.’

Inflation and growth were not in opposition to each other, as entrenched inflation ‘is the worst enemy of confidence, and therefore of growth’, he said. European growth was ‘more resilient than we feared just a few weeks ago’, so that there would be no ‘hard landing’ next year, but rather a ‘strong slowdown’ followed by ‘a fairly significant recovery in 2024 and 2025’, he said.