ECB’s Schnabel: Nonstandard Measures’ Side Effects Milder than Claimed

12 October 2020

By David Barwick – FRANKFURT (EconoStream) – The decline in the real equilibrium interest rate has not rendered monetary policy ineffective and the European Central Bank’s unconventional policy tools have not had as harmful side effects as some suggest, ECB Executive Board member Isabel Schnabel said Monday.

In a speech at the Interparliamentary Conference on Stability, Economic Coordination and Governance in the European Union, Schnabel, according to a text made available by the ECB, promised that the ECB would remain a reliable source of support during the crisis.

‘[M]onetary policy has not become powerless in the wake of the fall in the real equilibrium interest rate’, she said. ‘Nor have the side effects of our novel measures been as drastic as the public debate at times suggests.’

There is no evidence that the ECB’s sovereign debt purchases have allowed governments to ignore market signals, or that such purchases have induced governments to increase their exposure to risk in the knowledge that they can share the cost of doing so, she said.

Als, governments have not assumed more debt because of lower borrowing costs, she said, observing that almost all euro area member states’ primary balances improved after the ECB began to buy sovereign debt.

‘Moreover, the sensitivities of euro area sovereign bond yields to macroeconomic news and risk remain far removed from the complacency that characterised financial markets in the run-up to the global financial crisis’, she said.

However, she affirmed, unconventional monetary policy brings a higher risk of adverse side effects with time and intensity of deployment.

Schnabel assured that the ECB would ‘remain a stable and reliable source of support throughout the crisis. Our policy measures will continue to be geared towards ensuring that financial conditions remain consistent with a return of inflation towards our aim in the medium term, in line with our mandate.’

Although sovereigns must eventually commit credibly to putting their fiscal houses in order, she said, ‘this should happen only once the economy has returned to a sustainable growth path.’

When it does happen, European fiscal rules that are ‘too complicated, hard to enforce and procyclical’ should be revised, she said.

However, ‘[t]hese are not the times to worry that rising government debt today could undermine price stability tomorrow’, she said. ‘On the contrary, using fiscal and structural policies more actively in the current environment will, if used wisely, support price stability and foster central bank independence.’

Schnabel cited estimates suggesting that the real short-term policy rate in the Eurozone needed to be below zero to support inflation.

The ‘novel monetary policy tools’ introduced by the ECB in recent years ‘were not only necessary to fulfil our price stability mandate, but … also had considerable positive effects on growth and employment in the euro area’, she said.