A senior executive of the European Central Bank said that the negative impact of the European Central Bank’s bond purchases is increasing, while its earnings are fading, and warned that the policy is pushing up asset prices and creating risks. Financial instability.
Isabel Schnabel, the European Central Bank’s executive in charge of market operations, Said In periods of market turmoil or recession, asset purchases are “an important tool”, “but as the economy develops, their cost-benefit ratio will deteriorate.”
Schnabel stated that bond purchases make investors dependent on bonds, thereby increasing “moral hazard”, adding that they can lead to “excessive risk-taking and overvaluation” and lead to a shortage of sovereign bonds in some countries such as Germany.
Her comment is that the European Central Bank may Submit only When its management committee meets next week to decide how much stimulus measures to provide next year, it will maintain its bond purchases in the short term.
The central bank is expected to announce in March that it will stop purchasing new assets under the 1.85-ton Pandemic Emergency Purchase Program (PEPP) that was launched last year in response to the pandemic.
Analysts predict that the European Central Bank will buffer the impact on the market by expanding another long-term asset purchase program running with PEPP. But the European Central Bank may only promise to continue these purchases in the months after March.
As Eurozone inflation soars to A record high It was 4.9% in November. The European Central Bank will almost certainly raise its 2022 inflation forecast next week to well above its 2% target, which makes the reason to continue buying large amounts of bonds more difficult.
“By gradually shifting the policy portfolio from net asset purchases at the hands of monetary policy goals, the central bank can effectively reduce financial stability risks,” Schnabel said.
Since the European Central Bank started buying bonds in 2015, it has built an asset portfolio of 4.6 trillion euros. Analysts worry that any signs of “hawkish” turning away from stimulus measures may trigger a sell-off in the euro zone bond market.
Schnabel stated that “the Eurozone is still prone to splitting” and any “unexpected policy adjustments” may result in “funding conditions undergoing more drastic changes than expected”. She added that the European Central Bank could benefit from “a reliable backing committed to dealing with the risk of such fragmentation.”
Other European Central Bank policymakers have stated that if necessary, the European Central Bank can retain the option to restart asset purchases under PEPP in response to market chaos. Schnabel said the plan allows banks to have greater flexibility in the timing and types of purchases, “effectively providing this support function during the pandemic.”
The German economics professor joined the European Central Bank’s board of directors nearly two years ago. He dismissed the idea that the European Central Bank could raise interest rates before it stopped buying assets.
She also said that in response to the “unfavorable supply-side shock” that has pushed inflation above the ECB’s target this year, it is meaningless to raise interest rates. She said that this would “risk of stifling the recovery, and given the long-term lag in transmission, it will put downward pressure on inflation when the shock may have subsided”.