WASHINGTON (Reuters) -European Central Bank President Christine Lagarde on Wednesday singled out interest rate increases as the best tool to fight runaway inflation in the euro zone even as a debate about mopping up excess cash got underway.
Trying to fight runaway prices, the ECB has raised its rate on bank deposits to 0.75%, promised more hikes and begun a debate about whittling down its 3.3-trillion-euro ($3.20 trillion) bond holdings – legacy of its fight against deflation in the last decade.
Lagarde emphasized rate hikes as the ECB instrument of choice at present even as other policymakers began publicly debating how and when to stop reinvesting some of the proceeds from the debt the central bank had bought since 2015.
“The traditional interest rate… under the current circumstances is the most effective, the most appropriate and based on the proportionality assessment that we conduct in choosing from the toolbox is the one that actually works best,” Lagarde told an Institute of International Finance (IIF) event in Washington.
Also speaking in Washington, Dutch central bank chief Klaas Knot said the ECB needed at least two more rate hikes of up to 75 basis points each before reaching the neutral level, where it neither stimulates nor curbs the economy.
However, Knot also called on the ECB to follow the Federal Reserve in letting some of its bonds mature without replacing them — a way of reducing the amount of money sloshing around the financial system.
“Once we have completed the path to the normalization of our policy rate, it’s pretty clear that, then, also the roll-off of our asset purchases should become part of our instrument mix,” he told a forum at the International Monetary Fund’s annual meeting.
His French peer Francois Villeroy de Galhau said in New York late on Tuesday the ECB should first get banks to repay the 2 trillion euros they have borrowed from the central bank and then start shrinking its bond holdings.
Lagarde acknowledged the discussion about this so-called “quantitative tightening” had started and would continue.
($1 = 1.0324 euros)
(Reporting By Balazs Koranyi; Writing by Francesco Canepa in Frankfurt; Editing by Toby Chopra and Jonathan Oatis)
