By Balazs Koranyi and Francesco Canepa
SINTRA, Portugal (Reuters) – Some European Central Bank policymakers are urging a review of the aggressive monetary stimulus policies the ECB employed for nearly a decade to tackle low inflation, judging they may have done more harm than good, sources told Reuters.
Six policymakers said they want to debate and possibly change a clause in the ECB’s strategy statement that calls for “especially forceful or persistent” action when interest rates are at rock bottom. All spoke on condition of anonymity because the discussion was private and preliminary.
Such a debate is expected to take place in a long-planned ECB strategy review that is about to kick off, concluding some time next year.
“We bought trillions and trillions of euros of assets and still didn’t get inflation back to target,” one of the sources said. “Years after the end of this stimulus, we are still sitting on more than 3 trillion euros of excess liquidity, so that policy response tied our hands for years.”
Their calls represent one of the most direct challenges yet to the logic that underpinned quantitative easing (QE) policies deployed by many central banks following the global financial crisis to stimulate economies and avert the risk of deflation.
The ECB bought some 5 trillion euros ($5.4 trillion) of debt – mostly government bonds – over nearly a decade before the COVID pandemic, and also gave banks interest-free loans.
While the issue seems distant now that inflation is above target and interest rates high, recent comments by the Bank for International Settlements, a global umbrella group for central banks, have reignited debate about QE’s effectiveness.
“The BIS generated a quite a storm this weekend and I think they are right in that we need to reassess how we use some of our tools,” one of the ECB sources said.
An ECB spokesman declined to comment.
The BIS argued that prolonged use of ultra-easy monetary policy generates diminishing returns and creates unwelcome side-effects, including excessive risk-taking by firms, households and governments.
“These limitations were not fully appreciated at the time the measures were first introduced,” it said in its flagship publication.
Instead, the sources argued, central banks could simply live with modest inflation undershoots because the cost is relatively small compared to the stimulus effort.
EXCESS LIQUIDITY
The ECB ended its QE and TLTRO bank lending programmes in 2022 and has been running down its bond holdings since 2023.
But 3 trillion euros of excess liquidity remains in the system even after a string of sharp interest rate hikes and could still take a half a decade to decline to desired levels.
All of the six ECB policymakers who spoke to Reuters agreed that asset purchases were the right tool in case of a shock such as the pandemic, for which the euro zone’s central bank launched a separate bond-buying scheme.
And some of them defended the ECB’s decade of government and corporate debt purchases, saying it was the correct response given the information available at the time and had prevented ultra-low inflation from damaging the labour market.
But others said QE should not be used with such intensity and for so long to respond to long-term issues, particularly structural deficiencies that need to be tackled by governments rather than central banks.
All six sources said the ECB should maintain a symmetric approach to its 2% target, but some argued that it should remove its commitment to an especially forceful or persistent response to low prices. Others want a clear acknowledgement that prolonged asset buys are not an appropriate policy instrument.
The sources pointed as an example to Switzerland, where the central bank aims to keep inflation in a zero to 2% band, and where the economy still fared well even when price growth was not pinned at 2%.
Separately, Irish central bank chief Gabriel Makhlouf questioned the impact of quantitative easing on economic equality.
“I have reservations about QE, have had for some time,” Makhlouf told Reuters on the sidelines of the ECB’s annual Forum on Central Banking in Sintra, Portugal.
“I think QE played a positive role in supporting employment during very low rates, but I’m not sure whether their impact on asset prices, wealth and inequality, whether we understand well enough to be able to say that overall this was a net positive.”
Makhlouf also advocated a deeper look at the net contribution of asset buys when the ECB reviews its strategy.
Other ECB policymakers in Sintra defended bond purchases, however, arguing that letting inflation run too low would have meant allowing the economy to operate with spare capacity.
If that had gone on for too long, they said, some of that spare capacity would have been destroyed, curbing the economy’s potential for future growth.
($1 = 0.9298 euros)
