(Bloomberg) — European Central Bank Executive Board member Isabel Schnabel said that large bond holdings accrued under quantitative easing risk complicating efforts to fight inflation.
(Bloomberg) — European Central Bank Executive Board member Isabel Schnabel said that large bond holdings accrued under quantitative easing risk complicating efforts to fight inflation.
The current size of the balance sheet is bigger than necessary to effectively implement the ECB’s monetary-policy stance, Schnabel said Thursday in a speech. Shrinking the portfolio would bring benefits that include allowing officials more space to act should interest rates be cut to the extremes seen last decade, she said.
“The large stock of assets acquired under QE continues to provide significant monetary-policy accommodation,” Schnabel said at a Money Market Contact Group meeting in Frankfurt. That “may run counter to our efforts to bring inflation back to our 2% target in a timely manner.”
The ECB began reducing its €5 trillion ($5.3 trillion) bond portfolio this month, having halted net purchases last year. It’s lifted its deposit rate to 2.5% from less than zero in mid-2022 to stem the worst spike in consumer prices since the euro was introduced.
Schnabel said markets anticipating the balance sheet run-off over coming years has already helped unwind the impact of quantitative easing, and contributed to raising government borrowing costs.
ECB staff estimates show bond-buying programs lowered the 10-year GDP-weighted risk premia of the four largest euro-area countries by around 180 basis points through the end of 2020. Since September 2021, markets had reversed around 40 basis points of this impact, she added.
–With assistance from Libby Cherry.
(Updates with comments on QE impact from fifth paragraph.)
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