By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) -The European Central Bank will stand by its aggressive stimulus policy of the last decade in a strategy review, side-stepping calls for self-criticism after a bout of high inflation and sizeable losses, several ECB policymakers told Reuters.
The review, which began in March, will address some big questions about the way the ECB works, including whether massive bond purchases, negative interest rates and giving guidance on the future path for rates remain good policy tools.
Conversations with ECB policymakers suggest the euro zone’s central bank will largely endorse its past largesse, making only minor changes to a strategy document that was last updated four years ago. It will offer little, if any, criticism of steps it took during the sudden surge in inflation seen during 2021-22.
In particular, the ECB is likely to keep a reference to the need for “especially forceful or persistent” action – a byword for quantitative easing (QE) bond-buying and other stimulus measures – when inflation and interest rates are at rock bottom, the sources said. They asked not to be named because work on the review is still ongoing.
An ECB spokesperson declined to comment.
Belgian central bank governor Pierre Wunsch has said the ECB should discuss dropping that clause. His Dutch peer Klaas Knot and German ECB board member Isabel Schnabel have both argued that bond purchases should be used more sparingly in future, arguing that short bursts of QE are effective but lengthy ones become too costly.
Policymakers were presented with a preliminary strategy document at a retreat in Porto on May 6-7 and made suggestions for possible changes that will be incorporated in the coming weeks, the sources said. The document is likely to be finalised in early summer.
In Porto, ECB staff presented analysis about the effects of the central bank’s stimulus policies, concluding that these programmes had been beneficial and should remain part of the ECB’s toolbox in the future.
There was general agreement, however, that so-called “forward guidance” on interest rates should be used parsimoniously after it led the ECB to react too late to the spike in inflation in 2021-22.
The review’s preliminary conclusions had left some governors dissatisfied because they were hoping for a more critical retrospective on these policies.
The sources nevertheless said the discussion had been collegial, without open rifts, suggesting that the document could be approved by a large consensus.
The strategy document is also likely to say that the ECB is operating in an environment of high uncertainty and reaffirm its commitment to a “symmetric” 2% inflation target, meaning that undershoots and overshoots are equally undesirable.
By creating large amounts of reserves via bond purchases to avert deflation through a decade of crises, the ECB effectively set up itself and the euro zone’s 20 national central banks for losses once inflation and rates rose.
The bloc’s central banks are currently paying a 2.25% interest rate on some 2.8 trillion euros ($3.11 trillion) worth of bank reserves.
While turning a profit is not a central bank’s goal, losses deprive governments of dividend income, fuel criticism of it as an institution and risk eventually eroding public confidence.
($1 = 0.8992 euros)
(Editing by Catherine Evans)
Comments