The European Central Bank (ECB) should use quantitative-easing programmes primarily in times of crisis as their costs might be more pronounced than other tools in its repertoire, executive board member Isabel Schnabel said on Tuesday.
“Asset purchases can be a powerful tool when financial markets are in turmoil,” she said in a speech in Tokyo on Tuesday. “Outside these periods, however, central banks need to carefully assess whether the benefits of asset purchases outweigh the costs.”
Still, “the effectiveness of QE (quantitative easing) in stimulating aggregate demand is state dependent,” she said. “QE can come with costs that might be higher than those of other policy instruments.”
Previous programmes
The ECB embarked on large-scale asset purchases in 2015 in a bid to revive inflation that had become too slow. It later launched a separate programme during the Covid-19 pandemic. Holdings peaked at about €5 trillion ($5.4 trillion), mostly consisting of government debt.
Policymakers started rolling off assets in 2023 while they hiked interest rates to contain surging prices. The decline will accelerate mid-year when reinvestments of some pandemic holdings end.
New framework
ECB officials recently agreed a new framework for how to run policy in the future, largely preserving the current system of steering interest rates while trying to give banks more of a say over how much liquidity they need to operate. That is supposed to involve a new “structural” portfolio of bonds, though the details have yet to be hammered out.
Next year, the ECB’s monetary policy strategy is up for a scheduled review. The central bank’s QE approach could be part of that exercise.
Schnabel, who is responsible for market operations at the central bank, said that while more research is needed, “two broad lessons can be drawn at this stage”.
“Central banks may face shocks in the future where the optimal policy response requires a more patient approach to reaching their inflation aim in the vicinity of the effective lower bound, especially after balance sheet crises,” she said.
“Central banks can reduce the costs of asset purchases by using them in a more targeted and parsimonious manner, intervening forcefully when needed but stopping them faster. Examples are the commercial paper purchases by the ECB in 2020 and the interventions by the Bank of England during the LDI crisis,” she added.
She also said that “in a bank-based economy like the euro area, the experience also suggests that other measures, such as targeted longer-term refinancing operations, can provide substantial support to the economy in the face of disinflationary shocks and instability, while leaving a smaller and less persistent footprint, as they can be reversed more quickly if conditions change.”
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