ECB’s Nagel: Central Bank Bond Purchases Should Be Limited to Exceptional Circumstances

1 October 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Tuesday that the ECB should only significantly increase its balance sheet under exceptional circumstances.

In a speech at the Conference on Markets and Intermediaries, Nagel, who heads the German Bundesbank, argued that although extensive bond purchases contribute to price stability in an era of low inflation, they are also associated with numerous side effects in financial markets.

‘Without prejudging the outcome of the [ECB's strategy] review, I think their use should be limited to exceptional circumstances’, he said.

According to Nagel, central banks’ actions worldwide since the Great Financial Crisis, including balance sheet expansion, additional liquidity injection and the broadening of collateral frameworks, have had side effects.

‘Introducing a CBDC could also have unintended side effects’, he said.

If bank customers were allowed to hold central bank digital currency in large amounts, periods of banking distress could trigger large and sudden shifts from deposits into CBDC, he warned.

‘If CBDC were too attractive a substitute for deposits, commercial banks’ access to retail deposits could erode over time. Which could lead to structural disintermediation and call into question our proven two-tier banking system’, he said.