Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
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”.
Additional reporting by Elettra Ardissino in London.
A full transcript of the interview has been published by the FT’s Monetary Policy Radar.