ECB Governing Council member Francois Villeroy de Galhau said it’s still too early to decide whether the central bank should hike by 50bps or 75bps at October 27 meeting. But he noted interest rate should be at neutral level, or “a bit less than 2%” by year end.
Then, ECB could start shrinking 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, whilst at the same time contemplating tightening policy rates above neutral,” he added.
“The reimbursement of TLTROs comes first, and we should avoid any unintended incentives to delay repayments by banks,” he said. “Here we could start earlier than 2024, maintaining partial reinvestments but at a gradually reduced pace.”
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