Villeroy Expects ECB Rate Hike `Some Quarters' After QE Ends

(Bloomberg) -- European Central Bank policy maker Francois Villeroy de Galhau signaled that he expects bond purchases to end this year and an interest-rate hike could follow in 2019, putting him in the camp of officials who see the current euro-area slowdown as temporary.

In an interview in Paris, the French central banker said inflation will resume its acceleration in coming months, with underlying price pressures set to strengthen. Other policy makers speaking the same day highlighted that they are watching to see if the economy can shrug off its weak start to the year.

The ECB could say a rate increase will follow the halting of net asset purchases by “at least some quarters, but not years” he said on Monday in a Bloomberg TV interview with Francine Lacqua. “We will probably give additional guidance for the end of the year for the timing of the rate hike and the contingencies.”

Policy makers have yet to formally discuss the future of their quantitative-easing program. Purchases are currently scheduled to run until at least September, totaling more than 2.5 trillion euros ($3 trillion), and officials expect interest rates to stay at current record lows until “well past” the end of net buying. Maturing debt will be reinvested.

The euro rose, and was up 0.3 percent at $1.1974 at 6:53 p.m. Paris time.

While Executive Board member Benoit Coeure affirmed the ECB’s commitment on borrowing costs, he also expressed concern that excess liquidity may reduce the impact of any future rate hikes.

“One possible way to overcome this situation, if and when needed, would be to consider expanding access to the liability side of central-bank balance sheets to other actors in financial markets,” he said in Geneva.

Slow Inflation

ECB chief economist Peter Praet opted to repeat a speech from a week earlier at an appearance in London, reiterating that there is “so far no evidence that the moderation in the pace of economic expansion reflects a durable softening in demand.” Nevertheless, he said officials will monitor the incoming data and that there is still a need for an “ample degree” of stimulus.

Olli Rehn, the deputy governor of the Bank of Finland who has been nominated to succeed Governor Erkki Liikanen this year, was slightly more downbeat in a speech in Rome.

“Forecasts are always uncertain, and this one is no exception,” he said. “Currently, risks to the medium-term economic outlook seem to be tilted on the downside.”

Rehn cited external risks such as trade protectionism and repricing as market rates tighten, as well as internal concerns such as insufficient structural reforms by governments. Those factors largely reflect the ECB’s official line, though the Frankfurt-based central bank says the risks to economic growth are “broadly balanced.”

The slow progress toward ending stimulus largely reflects muted consumer-price growth -- though that’s a phenomenon much of the industrialized world is experiencing. Speaking at the same event in Paris, Federal Reserve Bank of Cleveland President Loretta Mester said it was too soon to declare the U.S. central bank has reached its inflation goal “on a sustained basis.”

--With assistance from Francine Lacqua

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net, Jana Randow in Frankfurt at jrandow@bloomberg.net, Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien

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