ECB’s Schnabel: QE Needs to Be Used Carefully Outside Crisis

28 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Tuesday said that quantitative easing (QE) exposed central bank to risks and needed to be used prudently if deployed outside the context of market turbulence.

In a speech at 2024 BOJ-IMES Conference in Japan, Schnabel said, according to a text provided, ‘My main message today is that asset purchases can be a powerful tool when financial markets are in turmoil. Outside these periods, however, central banks need to carefully assess whether the benefits of asset purchases outweigh the costs.’

During periods of turmoil, asset purchases could improve market functioning, she said, but in the longer term, QE could contribute to the scarcity of government bonds.

‘Asset scarcity can thus hamper market functioning and impair the steering of short-term interest rates’, she said.

Reversing the effects of QE might take a long time, she said.

Having risk premia compressed in many market segments made financial conditions more accommodative than they would otherwise be, she said.

‘This may have weakened the transmission of monetary policy during the recent tightening cycle’, she elaborated.

In this context, central banks needed to assess the proportionality of their policy measures, considering the impact of the options available, she said.

‘In a bank-based economy like the euro area, the experience also suggests that other measures, such as targeted longer-term refinancing operations [TLTROs], can provide substantial support to the economy in the face of disinflationary shocks and instability, while leaving a smaller and less persistent footprint, as they can be reversed more quickly if conditions change’, she said.