ECB Council Member Calls for Review of Balance Sheet Reduction Methods

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ECB Council Member Calls for Review of Balance Sheet Reduction Methods

European Central Bank (ECB) Governing Council member Bostjan Vasle has called for a comprehensive review of methods to speed up balance sheet reduction amid Italy's bond-market turmoil. The call was made from Marrakech on Thursday, providing a new perspective on the ECB's approach to Quantitative Tightening (QT) as the era of interest rate hikes, marked by ten consecutive increases, draws to a close.

The discussions surrounding these measures are fraught with complexity due to divergent views among the council's 26 members, investor backlash against Italy's budget plans, and the end-2024 cutoff for Covid-era Pandemic Emergency Purchase Programme (PEPP) portfolio reinvestments.

Vasle has expressed his support for selling bonds from the Asset Purchase Program (APP) as an alternative to prematurely ending PEPP reinvestments. This viewpoint is closely monitored by council members Gabriel Makhlouf, Pierre Wunsch, and Boris Vujcic, particularly in light of market trends in Italy.

In the face of geopolitical tensions and strong labour markets, Vasle has proposed targeted fiscal measures to counter inflation and consumer prices. This stance contrasts with the robust monetary policy response and ongoing expansionary fiscal policy. He also highlighted risks in the transmission works and anticipates a return to 2% inflation by H2 2025.

The proposed changes come at a critical juncture for the ECB as it navigates through economic uncertainties and seeks ways to stabilize the financial markets. The outcome of these discussions could have significant implications for the ECB's future policy direction and its approach towards managing inflation and economic growth in the Eurozone.

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