ECB’s Guindos Sees QE Ending in July, Paving Way for Rate Hike

Author of the article: Bloomberg News Jana Randow and Alessandra Migliaccio (Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast. The European Central Bank should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, according to Vice…
ECB’s Guindos Sees QE Ending in July, Paving Way for Rate Hike

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Bloomberg News

Jana Randow and Alessandra Migliaccio

(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The European Central Bank should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, according to Vice President Luis de Guindos.

Any decision will hinge on the ECB’s economic forecasts at its next policy meeting in June, though it’s already “crystal clear” that higher inflation and lower growth will be part of the mix, Guindos said in a Bloomberg interview. He discounted the chance of a recession and stagflation in the euro area.

“I see no reason why we should not discontinue our Asset Purchase Program in July,” Guindos said. “For the first rate hike we will have to see our projections, the different scenarios,” but “from today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide.”

The ECB’s Governing Council has moved toward unwinding crisis-era stimulus for months and reiterated plans last week to press ahead — despite heightened uncertainty about the economic implications of the war in Ukraine. Traders see a 75% chance of a quarter-point move in July, and are bracing for the deposit rate to reach zero by October.

Guindos argued that monitoring inflation expectations and wage growth will be crucial to getting it right.

“If we start to observe a de-anchoring of inflation expectations and second-round effects, then this is going to be a key element for the future of monetary policy,” he said. “The Governing Council looks at these data at every meeting.”

Inflation in the 19-nation euro area hit 7.5% last month, and Guindos predicted it’s getting “closer to the peak.” Even though price pressures should start to ease in the second half, he doesn’t expect the headline rate to fall below 4% this year.

Guindos’s Belgian colleague Pierre Wunsch said in a separate Bloomberg interview that the ECB could lift policy rates above zero before the end of the year, prompting traders to bet on three quarter-point hikes from the ECB in 2022. Wunsch sees July as a potential start date for rate increases. 

Latvia’s Martins Kazaks told Bloomberg a rate hike in July is “possible” and their German counterpart Joachim Nagel is also among those envisaging a liftoff this summer.

For the ECB, removing policy accommodation means treading a fine line. Its key deposit rate has been negative for nearly eight years, and bond markets have enjoyed almost uninterrupted support in the form of large-scale asset purchases for much of that time.

The prospect of highly indebted countries in the euro area’s south losing that support at a time when bond issuance is rising to fund investments in energy independence and defense has raised the specter of a new debt crisis. Bloomberg reported earlier this month that ECB staff is working on a backstop to use against market stress. 

Guindos cautioned that “any decision taken to limit fragmentation should not interfere with our monetary policy stance.” He added that the ECB has “some instruments” to address this problem, though the Governing Council hasn’t “discussed any new anti-fragmentation program in detail.”

For now, policy makers are determined to flexibly reinvest maturing bonds purchased under their pandemic program to keep yields and spreads under control. Extending this flexibility to the ECB’s regular purchase scheme isn’t an option, Guindos said.

“We have seen a little widening of spreads for Italy, Spain or Portugal,” he said. “But fragmentation has been contained.”

©2022 Bloomberg L.P.

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