Key ECB rate should be back in positive territory by year end: Villeroy
2022.05.06 11:21
FILE PHOTO: A symphony of light consisting of bars, lines and circles in blue and yellow, the colours of the European Union, illuminates the south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 30, 2021. REUTERS/Wol
FRANKFURT (Reuters) – The European Central Bank should raise its deposit rate back into positive territory this year, French central bank chief Francois Villeroy de Galhau said on Friday, comments that point to his support for at least three rate hikes in 2022.
The ECB has been moving slowly to remove support this year but record high inflation and surging longer-term price expectations have prompted a growing number of policymakers to advocate a quicker end to nearly a decade-long experiment with unconventional support.
In a first step, the ECB should end bond purchases at the end of June, then raise its minus 0.5% deposit rates in “the next few” policy meetings, Villeroy said, declining to specify his preferred lift-off date.
A host of policymakers have recently made the case for a move already in July, with little push-back from policy “doves,” suggesting that a summer rate hike is now the most likely option.
“I would rather set a marker a bit further down the road: barring unforeseen new shocks, I would think it reasonable to have entered positive territory by the end of this year,” Villeroy, an influential voice on the ECB’s Governing Council, said in a speech.
With the deposit rate at -0.5%, getting back into positive territory would suggest at least three 25-basis-point rate hikes, including the ECB’s first increase since 2011, if the ECB followed the “gradual” approach advocated by Villeroy.
The bank should then gradually move its nominal interest rate towards the “neutral” level, which is between 1% and 2%, a full percentage below the U.S., Villeroy added.
High inflation, including a rise in longer-term inflation bets is the main reason for the rate rises as recent surveys suggest that expectations are “less and less” anchored around the ECB’s 2% target.
De-anchoring, in central bank jargon, is a worrisome phenomenon when price growth expectations rise as investors start doubting the central bank’s resolve to get inflation back to its target.
Rate hikes could also help the euro regain some strength against the dollar as currency weakness lifts imported inflation.
“The level of the euro matters significantly for imported inflation,” Villeroy said. “A euro that is too weak would go against our price stability objective.”
To help markets cope with the reduction of ECB support, Villeroy said the ECB could offer a new longer-term refinancing operation to banks.
Villeroy also suggested a new approach to tackling a potential surge in the spread between the yields of euro zone members.
It could agree to buy bonds for a limited time with the explicit commitment to sell them once the turbulence is over. Or it could absorb the liquidity injected through a liquidity off-setting operations, much like it did in its earlier Securities Markets Programme.
