ECB’s Vasle Says Negative Rates May End by Turn of the Year

(Bloomberg) -- The European Central Bank may end eight years of negative interest rates in late 2022 or early 2023 as it steps up efforts to curb record euro-zone inflation, according to Governing Council member Bostjan Vasle.

With Russia's war in Ukraine stoking already-soaring prices and wages showing signs of a stronger move higher, policy makers must be “very careful” to act before further price pressures materialize, the Slovenian central bank chief said in an interview. 

He agreed with a suggestion last week by fellow Governing Council member Klaas Knot that net asset purchases, planned to end sometime in the third quarter, could stop as early as July.

“The most important thing for me is that we will start this process not very late in the year and have the opportunity to be out of negative territory by the turn of the year,” Vasle, who ranks among the ECB's hawkish voices, said Monday in Ljubljana.

“We're still expecting quite strong positive growth rates, and if that scenario materializes I don't see any reasons why we wouldn't continue with policy normalization after the turn of the year and go above zero with interest rates,” he said.

Following the remarks, money markets maintained wagers for two quarter-point hikes by year-end and four such increases by March 2023.

The ECB embarked on negative rates in 2014 as it sought to revive inflation that had sagged amid Europe's debt crisis. But now it has the opposite problem: price gains are more than three times the 2% target and lofty energy costs are pushing higher still following Russia's invasion.

With inflation overshooting expectations for months, the ECB decided in March to speed up its timetable for ending bond-buying -- a stimulus tool that began back in 2015.

Vasle doesn't see a need to further accelerate that process, saying the current timetable is flexible enough and “we don't want to remove needed support to the economy.” But, having experienced hyperinflation after Yugoslavia collapsed, he's very aware of price risks and advocates a “slightly faster” normalization of monetary policy than some of his colleagues.

That's “one element affecting my understanding of not only inflation, but especially inflation pressures which are in the pipeline at the moment,” Vasle said. “It also gives me additional insight into what's happening in the labor market and how these expectations regarding wages will be formed in future months and quarters.”

Despite consumer prices jumping 7.5% from a year ago in March, the ECB's baseline forecast for 2022 of 5.1% “is still quite realistic,” according to Vasle.

“My expectation is that in a quarter or two we'll see the peak of inflation and then a gradual easing by the end of the year,” he said. “The last inflation reading was indeed very high, but in the context of the conflict and the rising prices across various energy segments, it was something which wasn't so unexpected.”

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