Past ECB bond buys may have blunted rate hikes’ impact, Schnabel says

The European Central Bank’s massive bond purchases in the recent past may have blunted the impact of its subsequent interest rate hikes by keeping a lid on borrowing costs in the debt market, ECB policymaker Isabel Schnabel said on Tuesday.

The ECB bought bonds worth more than 5 trillion euros between 2015 and 2022 in a bid to revive inflation that was then too low.

But it pulled a belated U-turn when prices started soaring much faster than it had expected in the aftermath of the COVID-19 pandemic and Russia’s invasion of Ukraine.

The central bank for the 20 countries that share the euro is now shedding those bonds as they mature, but Schnabel said the massive stock of debt the ECB still owns might be interfering with its fight against inflation.

“Risk premia may remain compressed in many market segments, making financial conditions more accommodative than they otherwise would be,” Schnabel said at an event in Tokyo.

“This may have weakened the transmission of monetary policy during the recent tightening cycle.”

The ECB has raised the rate it pays on bank deposits to a record 4.0% although it looks set to start cutting it next week after inflation fell to just above its 2% target and credit came to a standstill.

Schnabel said the last decade’s bond buying helped stabilise financial markets at times of stress but had costs such as causing central bank losses, interfering with market functioning and boosting inequality.

She advocated “more targeted and parsimonious” bond buys, “intervening forcefully when needed but stopping them faster” as the ECB did with purchases of commercial paper in the spring of 2020 and the Bank of England during the September 2022 market turmoil.

“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…while leaving a smaller and less persistent footprint,” Schnabel added.

The ECB has said it will, at some future point, create structural portfolios of bonds and loans to ensure sufficient liquidity in the banking system.
Source: Reuters (Reporting by Francesco Canepa; Editing by Jamie Freed and Clarence Fernandez)