Interview Olaf Sleijpen in de Financial Times

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Artikel Financial Times

Run on stablecoins could force ECB to rethink interest rates, warns top policymaker

New Dutch central bank governor says digital tokens linked to US assets could become ‘systemically relevant’

The European Central Bank could be forced to adjust monetary policy if a run on stablecoins were to send shockwaves through the economy, a top ECB policymaker told the Financial Times.

“If stablecoins in the US increase at the same pace as they have been increasing . . . they will become systemically relevant at a certain point,” Dutch central bank governor Olaf Sleijpen said in an interview, adding the digital tokens could create risks for financial stability, the economy and inflation in Europe that would potentially force the ECB’s hand.

This year, the volume of digital tokens that track currencies such as the US dollar has shot up by 48 per cent to more than $300bn as US President Donald Trump enacted new rules paving the way for stablecoins to be issued by the private sector. Many are backed by US Treasuries as underlying assets.

“If stablecoins are not that stable, you could end up in a situation where the underlying assets need to be sold quickly,” said Sleijpen, who is one of the 26 members of the ECB’s crucial decision-making body. This could primarily backfire on financial stability but also on the wider economy and inflation, he warned.

In such a scenario, the ECB would “probably have to rethink monetary policy”, he said, but was not sure if a cut or an increase would be needed. “I don’t know in which direction we would be going,” he said, adding that financial stability tools should be used first.

Sleijpen’s warning reflects concerns among ECB officials and policymakers about the rise of stablecoins linked to US assets.

A senior ECB official this summer flagged that the global rise of US dollar-denominated stablecoins could leave the Eurozone facing similar conditions to emerging economies, where widespread use of the US currency can hamper local policymakers’ efforts to set interest rates or control the money supply.

Nobel Prize-winning economist Jean Tirole has also warned governments could be forced into multibillion-dollar bailouts should the tokens unravel.

Sleijpen in July replaced Klaas Knot at the helm of De Nederlandsche Bank after his predecessor’s second seven-year term expired. Knot is seen as a potential contender to succeed Christine Lagarde, whose term as ECB president will expire in October 2027.

The new Dutch central bank governor said monetary policy in the Eurozone had moved to a “slightly better” place since June, when Lagarde first expressed that the ECB was “in a good place” — a sentiment she has since often repeated.

Sleijpen argued trade uncertainty had fallen since then, while economic growth in the bloc was holding up better than expected. Inflation was also broadly in line with the ECB’s 2 per cent medium-term target, he noted. “If you take our projections, the sensitivities around those projections, and the information that we have received since September, then there is no reason to move [interest rates].”

After eight quarter-point cuts that halved borrowing costs to two per cent, the ECB has kept borrowing costs unchanged over the past five months. Investors now see only a 25 per cent probability of another quarter-point cut by the end of next year, as implied in derivative prices, according to LSEG data. 

Asked if he shared the assessment of hawkish ECB executive board member Isabel Schnabel that risks to inflation are “tilted a little bit to the upside”, Sleijpen said he thought they were balanced. He pointed to a “high level of uncertainty”, which will require the central bank to continue to make decisions meeting by meeting and based on data.

In their latest projection in September, ECB staff forecasted six quarters of below-target inflation. But this alone does not merit another rate cut, Sleijpen argued, as the undershooting was driven by lower energy prices and a strong euro while households’ inflation expectations remained stable.

However, he stressed policymakers needed to closely monitor if that assessment proved correct, noting the ECB’s initial view in 2022 was the rise in inflation following Russia’s full-scale invasion of Ukraine would be temporary.

“For me, it is a lesson [from 2022] that you should be vigilant and challenge constantly if this is temporary and to what extent is it feeding through to the economy,” he said, adding that the recent experience shows “a shock can feed into the rest of the economy very fast”.

Transcript interview

Read the full transcript: FT interview with Olaf Sleijpen

FT: Since July, President Christine Lagarde repeatedly said that monetary policy was "in a good place". Do you share that view?

Sleijpen: Yes, I think we are in quite a good place. The ECB has really delivered in terms of inflation. We come from the highest inflation that we've seen in decades and managed a pretty soft landing in terms of output. Growth is not very high, but it's close to potential. Also, it has proved to be a bit more resilient than we thought it would be at the beginning of the year. However, what is important is that it's not a place that we're never going to leave. Depending on new insights, new data, of course, we might decide that other places are good places.

FT: Has this "good place" changed since President Lagarde first used this phrase in June?

Sleijpen: I think in some ways it probably has become slightly better. Some of the severe downside risks to growth that we were afraid of before the summer have become smaller. Uncertainty around our economic outlook and inflation outlook is still very large, but we have had a trade deal, and there is no retaliation which helps. The outlook growth is probably lower than in a world without economic fragmentation, but growth has been more resilient than we thought it would be.

FT:  Until the trade deal, the argument from the governing council seems to have been that trade tensions are an upside risk to inflation. Now they seem to be used as an argument for why further reductions aren't necessary

Sleijpen: To some extent [trade tensions] still are [an upside risk to inflation, but we haven’t seen it yet. Some models clearly said that tariffs would lead to higher inflation, but they featured retaliation and a depreciation of the euro. On the exchange rate front, we’ve seen the opposite and there was no retaliation. That explains why the impact on inflation has been more moderate. Having said that, the uncertainty around trade policy is still there. If export restrictions were to be put in place, this would be a negative supply shock as well.

If you take our projections, the sensitivities around those projections, and the information that we have received since September, then there is no reason to move.

We also know that there are tail risks that might change our view if they arise, but you cannot anticipate them. Some of them are actually quite severe: an intensification of geopolitical risks, an intensification of the hybrid war with Russia.

Another one is if stablecoins in the US increase at the same pace as they have been increasing. Then they will become systemically relevant at a certain point. If stablecoins are not that stable, you could end up in a situation where the underlying assets need to be sold quickly. That would create financial stability risks, and might also influence the outlook for inflation.  This would be a good example where I would say that the ECB would no longer be in a good place and would have to move.

FT: So one of the scenarios you have in mind is a run on US denominated stablecoins leading to fire sales of underlying assets?

Sleijpen: There are a lot of assumptions underlying it. If it really becomes a financial stability risk, you would firstly tackle it from a financial stability point of view. But it can also change the overall macroeconomic equilibrium. That would mean we would probably have to rethink monetary policy, though I don’t know in which direction we would be going.

But also, economic growth has proved to be pretty resilient. If I look at the forecasts or the projections from September and add to that the information that we got afterwards, like the PMIs, then it's fair to say that growth is close to potential. But if growth is going to disappoint and lead to disinflation, then we would be in a different place and we would have to look at the situation again. The high level of uncertainty that we have to deal with explains why we have the meeting-by-meeting approach and data dependence. I know it sounds like a mantra, but it is really how we operate. This is definitely not the time to give more forward guidance than that.

FT: But you will have a default view of what will be the next move?

Sleijpen: I don’t want to put likelihoods on it, because I really don’t know. But if I look at the [ECB staff’s September] forecasts and the information that we had since then, there's no reason at this point in time to change interest rates. In December we're going to have new projections and we'll see what the numbers will tell us and what our own assessment will be at that point in time. I was much more bearish on growth [at the start of the year] because I thought tariffs would have a huge impact. They still had an impact, but it was not as large as I had expected.

FT: In the current ECB staff forecast, inflation is predicted to undershoot for six quarters until 2027 . The ECB says it’s driven by exchange-rate and energy dynamics. But the ECB had also confirmed its headline inflation target in its last strategy review. So does this implicitly mean it's a core inflation target instead of a headline inflation target?

Sleijpen: No. The ECB is targeting 2% headline inflation over the medium term and allows deviations from 2% both ways. It says very explicitly that it allows symmetric deviations from the target. I think that the overall view in the governing council was that if the undershooting was coming from core inflation, we would have needed to lower interest rates. But this is not the view of the governing council.

The expected undershooting is mainly caused by temporary factors. At this point in time we don't see feeding through in the rest of the economy. I would add that inflation expectations haven't really moved. Of course we don’t target inflation expectations, but for me, this is also an important indicator.

 FT: Is there a scenario in which this could be a policy error like in 2021/2022 when the ECB argued that the rising inflation was only a temporary phenomenon?

Sleijpen: In the case of supply side shocks, you have to look through temporary deviations, and you should not react immediately. Monetary policy is not fine-tuning. The instrument that we use is actually pretty blunt. With the benefit of hindsight, we did make a mistake in 2022, where we believed that the inflation spike was temporary and we were wrong. The good news is that when the ECB came to the conclusion that it's not temporary, it acted forcefully.

But for me, it is a lesson that you should be vigilant and challenge constantly if this is temporary and to what extent is it feeding through to the economy. 

At this point in time, that leads me to the conclusion that no change is appropriate. But we have learnt in 2022 that it is really important to be vigilant, use your own assessment, and not only rely on models. You should really analyse something that at first sight looks like undershooting, or overshooting, and understand what’s happening.

Another lesson from 2022 is that a shock can feed into the rest of the economy very fast, so sometimes you don’t have much time to make a good assessment.

FT: The EU is decided to delay the roll out of the next stage of its CO2 trading scheme, the so-called ETS2 which according to ECB estimates would have raised headline inflation by 0.3 percentage points in 2027. What will the delay mean for the new inflation forecasts and monetary policy. 

Sleijpen: The implications for monetary policy depend on the bigger picture, and that I simply do not know. Let's not look at inflation from a partial point of view, but let's see how this all ends up in the forecast for next year. It doesn't change my outlook at this point in time.

FT: You mentioned that central banks shouldn’t try to fine-tune monetary policy. But regardless of what level of interest rates you are, at one point you have to make a decision to stop. Doesn’t this automatically require fine- tuning?

Sleijpen: Fine-tuning is adjusting at the margin in response to data, for example moving rates down slightly, then up again, in response to data. That’s not how monetary policy works, because the time lags are quite long.

Does this mean that you can only have cycles of either hikes or cuts? The answer is – not necessarily. We had individual hikes or cuts in the past that were not part of a cycle but were part of a risk management-motivated decision.

I wouldn't exclude the possibility that we will take one more small step, but fine-tuning in the sense of adjusting interest rates and then reversing quickly –  I think we would have to be careful to avoid that, because the time lags are quite long and there are risks involved. The experience of 2022 shows that even if we are a little bit late, if we come to the conviction that you have to do something, then we should do it quickly and forcefully.

FT: Some analysts say that this disregard of fine-tuning could imply that if there's another cut, it's unlikely to be just a 25 basis point cut.

Sleijpen:  I wouldn't agree, because there are also examples of where we did that in the past, and then it was very often what I call the risk management argument. I think it's a matter of communication. Fine tuning, for me, is constant adjustment.

FT:  Is the next change in interest rates potentially a hike? And how likely is this?

Sleijpen: I really don't know. I don't want to put probabilities on these kinds of scenarios.

There are scenarios, such as a negative supply shock and export restrictions on rare earths, that would have driven up prices a lot. That's clearly a scenario where people get nervous.

If we get tensions in the Middle East and oil prices go through the roof, and it's not temporary, then we may have to hike again. But if growth turns out not to be as resilient as we think it is now, then we’d have to reconsider whether we are still in a good place, and then I could imagine one more cut downward.

I cannot put a probability on these scenarios, but if you ask me, under what circumstances would the “good place” change? These are the scenarios I would be thinking about.

FT:  When you say that you were more bearish on growth and this hasn't materialized, what do you think are the reasons for this?

Sleijpen: I was pessimistic before we  had  the trade deals. The trade scenarios that we were working with were much more severe than the actual outcome, plus nobody really knew what uncertainty was doing to the economy.

I'm sure uncertainty is pushing down investment, but what we saw in a number of countries is that consumption growth was still quite strong and wage growth is quite high. Inflation has also come down, so real wages have been growing. Also, exports are holding much better than we expected.

The macro models may have overestimated the impact, because if companies are faced with tariffs then they adjust their behavior and find new markets to sell products.

FT:  Isabel Schnabel said the other day that she thinks inflation risks are slightly tilted to the upside. Would you share that?

Sleijpen: They’re balanced. I wouldn't stay tilted to the upside.

FT: How concerned are you about the impact of Chinese competition on Germany and the pan-European engineering sector?

Sleijpen: I share these concerns, but monetary policy is not the answer. Structural reforms should be the answer.  I'm not in favor of protecting incumbent industries. It's important to have a strong industrial sector, for economic reasons, for strategic autonomy reasons. But industry has to adjust and adapt.

In the Netherlands, we had coal mines in the 1960s, 1970s and then the government closed them down because they were too expensive.

It is important that a government provides the conditions for industrial transformation. In the Netherlands, the coal mines became chemical industries, but protecting your incumbents is not necessarily the answer.

One could also say that German car manufacturers missed the boat on electric vehicles. They’re starting now, but they’re behind the curve compared to competitors. There would be demand for their products, but they’re not delivering.

FT: Many people make the argument that China is a very highly subsidized economy and that this is unfair competition. 

Sleijpen: This is not our policy area, but if that is the case, the European Commission could say that they have evidence of dumping, of unfair competition, and take trade measures. That's different from applying subsidies.

There were a lot of good recommendations in the Draghi report, but the one I was a little bit more skeptical about was the policy of supporting national champions. We have to work together in Europe on R&D, energy, and developing ecosystems.

In Germany, there is an ecosystem around the car industry, for instance. Transforming it may be difficult and even painful, but it should not be kept in its current form at all costs.

FT: Is the Transmission Protection Instrument well designed and fit for purpose?

Sleijpen: We have the TPI and OMT to act against disruptions in monetary transmission, and that's what the instruments are designed for. In general, if monetary transmission is disrupted for whatever reason, that can be a cause for the ECB to act. But the ECB is also not there to bail out countries.

There is a level of ambiguity in the terms of reference, but there are also certain conditions and it also clearly is not set up as a bailout instrument. In the end, any country in the Euro area should have its budget in order and not believe that under all circumstances the ECB will bail it out.