Villeroy of the ECB presents a plan to reduce the balance sheet

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NEW YORK (Reuters) – The European Central Bank is expected to start trimming its balance sheet once its interest rate approaches 2%, first by forcing banks to repay loans and then by reducing its bond holdings, a said ECB policy chief François Villeroy de Galhau. tuesday.

Trying to combat runaway prices, the ECB raised its rate on bank deposits to 0.75%, promised further hikes and launched a debate on eliminating excess liquidity from the banking system – a legacy of its fight against deflation over the past decade.

Villeroy said it was too early to say whether the ECB should raise that rate by 50 or 75 basis points at its Oct. 27 meeting.

But he reiterated that the rate should be at its neutral level – or “just under 2%” – before the end of the year, clearing the way for the ECB to reduce its balance sheet.

“It would not be consistent to keep a very large balance sheet for too long in order to compress the term premium, while at the same time considering tightening key rates above neutral,” said the governor of the French central bank. to the audience at Columbia University.

At this point, Villeroy said the ECB should first ask banks to repay money borrowed under the central bank’s targeted long-term refinancing operations (TLTROs).

“The repayment of TLTROs comes first, and we must avoid any unintended incentive to delay repayments by banks,” he said.

Next, Villeroy said the ECB may start not replacing some of the maturing bonds it bought under its €3.3 trillion ($3.20 trillion) asset purchase program. dollars) over the past seven years – when inflation was too low.

“Here we could start earlier than 2024, maintaining partial reinvestments but at a gradually reduced pace,” he said.

He argued that the ECB should start this unraveling slowly, then accelerate, with a “clearly communicated end point … in terms of end date and size”.

($1 = 1.0299 euros)

(Reporting by Michael Derby; Writing by Francesco Canepa in Frankfurt; Editing by Lisa Shumaker)

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