Exclusive: ECB’s Šimkus: Ending APP Reinvestments from July ‘One of the Options’
6 April 2023
ECB’s Šimkus: Ending APP Reinvestments from July ‘One of the Options’
- Šimkus: Active asset sales ‘could be an option some day in the future’, but not for July
- Šimkus: ‘Let’s deal with the APP and then come back to the PEPP’
- Šimkus: ‘I don’t see a pause in hiking rates in May as a likely scenario’
- Šimkus: Size of rate moves ‘will depend on the data, but we still have some way to go’
- Šimkus: ‘We still need to let the impact of past policy moves kick in’
- Šimkus: ‘Need to maintain the restrictive stance for quite some time’
- Šimkus: ‘Very unlikely that we will see any decrease in interest rates this year’
- Šimkus: OPEC oil production cut a ‘one-off factor’; no need to ‘overreact or exaggerate’
- Šimkus: Core inflation to ‘remain pretty high’ throughout 2023
- Šimkus: Core inflation ‘stickier than many people think’
By David Barwick – VILNIUS (Econostream) – Completely halting reinvestments of maturing asset purchase programme securities as of July is one of the options for the European Central Bank, market conditions allowing, according to Governing Council member Gediminas Šimkus.
In an interview with Econostream onŠimkus, who heads the Bank of Lithuania, appeared to regard active sales from the ECB’s APP as not an option for the current year, and advocated dealing with the APP before including the PEPP in QT.
‘There are some side effects from a large balance sheet, like the distortion of income distribution and substantial growth in banking profits’, he said. ‘And there’s a scarcity of safe assets. We don’t need such a big balance sheet in the current economic environment. So, I think there’s room to discuss doing more about reducing the balance sheet.
And end to reinvestments as of July is ‘one of the options’, he said, although the ECB needs to ‘be mindful of the situation’ and prepare such a move with ‘thorough discussions.’
As for active sales, ‘[t]his could be an option some day in the future, but given the preconditions of being gradual and consistent, I don’t think this is an option for July’, he said. He did not rule out next year, noting merely that ‘next year is still next year, so it’s a long way to go.’
Involving the PEPP in the ECB’s QT anytime soon got a similarly lukewarm reception from Šimkus. The ECB should ‘start with the APP and consider the PEPP later’, he said. The continuation of PEPP reinvestments until at least end-2024, he said, was ‘kind of a decision that’s already taken, so to change it… let’s deal with the APP and then come back to the PEPP.’
Recent market turmoil related to some banks was unlikely to influence euro area macroeconomic developments meaningfully, he said. Even if banks were to tighten lending practices, he said, this would not lead to ‘any material impact’. With the initial decline in market rate expectations having subsequently reversed, ‘from a macroeconomic perspective, the effect will be limited’, he said.
Policy thus ‘should not overreact to unwarranted market tension spillover, but instead should take the necessary decisions’, he said.
Šimkus declined to endorse the view that another 50bp hike would be appropriate next month, but also flatly rejected a pause.
‘We have considerably increased interest rates in a pretty short period of time’, he said. ‘What we’ve done, not only with the rate hikes but also with the balance sheet reduction, is already having an impact. But the peak impact occurs with a lag of a year or even longer.’
On the other hand, ‘underlying price pressures are still strong, and we see from core inflation dynamics that it’s sticky’, he observed. ‘It’s likely that core inflation hasn’t yet reached its peak.’
‘So we may have come most of the way with monetary policy, but seeing the data available now, and given our March baseline projections, I don’t see a pause in hiking rates in May as a likely scenario’, he said. ‘Whether we should push as hard as we have in the past will depend on the data, but we still have some way to go to get inflation back into its 2% medium-term cage.’
His preference for not explicitly advocating pushing as hard with rate policy as in the past reflected the fact that ‘on the one hand, we still need to let the impact of past policy moves kick in’, he said. However, he urged, inflation should not be underestimated, in particular given that ‘the underlying pressures are not so visibly diminishing.’
‘If we were to take a pause, it might be that we would need to increase rates even more strongly later on’, he said. ‘So, we should continue doing what we need to do to kill the inflationary dragon. But after having done so much, I need to look at the data, including April’s inflation.’
Monetary policy was currently in restrictive territory and would not soon leave it, he predicted. ‘I’m thinking that we need to continue firmly with hiking and that we need to maintain the restrictive stance for quite some time’, he said. ‘It’s very unlikely that we will see any decrease in interest rates this year.’
The announcement of an oil production cut by OPEC earlier this week had little if any impact on his thinking, Šimkus said. While the effect was inflationary, it was a ‘one-off factor’ in a world of volatile raw materials prices, he said. ‘I don’t think, once again, that we should overreact or exaggerate’, he said. ‘There are many supply and demand factors to discuss.’
Core inflation in the euro area would peak this year, but in any case ‘remain pretty high’ throughout 2023, he said.
‘We will definitely see it coming down eventually, because we have taken actions and will take some more and we will dampen it’, he said. ‘My point is that it’s not about the precise timing of the peak, but that it’s stickier than many people think.’