ECB’s Müller: Monetary Accommodation Has Been Beneficial, But Not Without Risks

9 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller warned Friday that ECB policies had been beneficial, but also brought risks of asset overvaluation and dangerously high debt levels.

In a blog post on the website of the Estonian central bank, which he heads, Müller said that it was important to him in devising a new strategy framework ‘that we formulated as a clear principle … that we always assess the proportionality of these steps and the possible negative side effects when making different policy decisions.’

Although low interest rates and asset purchases have had many important beneficial effects, he said, ‘there are risks that so-called price bubbles will appear on the financial markets, i.e. the prices of financial assets will expand unnaturally high. There is also a risk that very cheap credit will create a fertile ground for a dangerous increase in the debt burden, especially for governments.’

The ‘seemingly cosmetic change’ from the previous formulation of the price stability objective to a point target of 2% will make it clearer what rate of longer-term inflation consumers, companies and financial markets should expect, he said.

The symmetry of the objective implies equivalent reactions to deviations in any direction, he said. ‘We are aiming for a 2% price increase over the medium term, which means that real inflation may temporarily fluctuate below and above 2%’, he wrote. ‘However, the European Central Bank does not aim to compensate for persistent inflation in the coming periods after two years of very small price increases.’

Given people know what level of inflation to expect the ECB to achieve, ‘it is also expected that all their expectations for long-term price increases will converge closer to this optimal level of 2%’, according to Müller. Ultimately, this ‘will also make it easier for the central bank to achieve its objectives and will hopefully require less vigorous market intervention in the future, for example through large-scale bond purchases.’