ECB’s Nagel: We Can Shrink Balance Sheet Faster

30 November 2023

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Thursday said that it was possible to increase the speed in which the ECB’s balance sheet was reduced.

In a speech at an event in Berlin, a text of which was posted to website of the German Bundesbank, which he heads, Nagel said that despite the recent contraction, ‘the [Eurosystem's] balance sheet total is still around €7 trillion. In my opinion, the pace of reduction can therefore still increase.’

‘In my view, a leaner central bank balance sheet is desirable, above all because it gives more space’, he said. ‘The market mechanism will then have more leeway again so that resources can flow to where they are used productively.’

That would make it more comfortable to for the ECB to ‘continue to take all the monetary policy measures necessary to achieve the primary goal of price stability’, he said.  

It was not yet possible to determine what the next steps regarding interest rates would be, as decisions were data-dependent, he said, noting that further hikes were not excluded.

‘In my view, inflation risks are tilted to the upside, not least because of the current geopolitical situation. That's why I don't rule out another rate hike’, he said. ‘At the same time, it seems to me that it is far too early to even think about a possible reduction in key interest rates.’

Financial markets were still uncertain about longer-term price developments, he said, with the conflict in the Middle East contributing to inflation risks.

‘The Eurosystem's 2% target acts as an anchor for inflation expectations. However, monetary policy cannot yet be satisfied with what has been achieved’, he said.

For the 2024, the ECB would ‘remain persistent in the fight against inflation’, he said, adding that the operational framework would be reviewed by spring.

‘This involves a wide range of decisions that affect the future size and composition of the Eurosystem's balance sheet’, he said.