ECB Hawks Go Hunting, Say Draghi May Have Made ‘A Mistake’ With New Easing

Dissenters to Mario Draghi’s latest stimulus push are making their voices heard as questions about the desirability of more broad-based monetary easing swirl.

Not surprisingly, Klaas Knot is leading the charge.

“This broad package of measures, in particular restarting the asset purchase program, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness”, he said, adding that “there are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behavior in the housing markets”.

Read more: Christine Lagarde Inherits ‘Unprecedented’ ECB Split After QE ‘Revolt’

Knot, ever the critic, went public with his feelings about the restart of QE last month, weighing in on August 29 with pointed criticism.

He’s right about the scarcity of low-risk assets and distorted pricing, that’s for sure. At this point, the Euro fixed income market is a veritable fun house mirror, featuring a laundry list of aberrations including negative-yielding “high” yield bonds and some €1.1 trillion of negative-yielding corporate debt.


Austria’s Robert Holzmann explained his reservations during an interview with Bloomberg TV. “It was a very intensive, but also a very constructive discussion”, he said, before making it clear that the main pushback revolved around hawks’ contention that further easing might not be very effective at this juncture.


“It may be that 2% [inflation] at the moment is out of reach and 1.5% also signifies stable prices [or] almost stable prices”, he went on to suggest. “So there is no need to use all the power you have in order to move up to 2% if the cost is too high”, he added, noting that he’s concerned the ECB might have made a mistake.

On Thursday, we suggested that incoming boss Christine Lagarde will need to ensure that internal dissent around QE doesn’t manifest itself in any overtly inflammatory public remarks from hawks, as that could serve to shake already fragile confidence in central banks at a pivotal juncture.

So far, the criticism probably doesn’t count as “overtly inflammatory”, but it’s worth noting that sources told Reuters over a third of policymakers opposed the new package.

Read more: ECB Cuts Rates, Restarts Open-Ended QE, Announces Tiering, Enhances Forward Guidance


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

2 thoughts on “ECB Hawks Go Hunting, Say Draghi May Have Made ‘A Mistake’ With New Easing

  1. What in the hell does this actually mean, in terms of bank liquidity?

    ====> The Governing Council of the European Central Bank (ECB) today decided to introduce a two-tier system for reserve remuneration, which exempts part of credit institutions’ excess liquidity holdings (i.e. reserve holdings in excess of minimum reserve requirements) from negative remuneration at the rate applicable on the deposit facility.

    The two-tier system will apply to excess liquidity held in current accounts with the Eurosystem but will not apply to holdings at the ECB’s deposit facility

    The exempt tier of excess liquidity holdings will be remunerated at an annual rate of 0%. The non-exempt tier of excess liquidity holdings will continue to be remunerated at zero percent or the deposit facility rate, whichever is lower.

  2. A QE clue?

    Quantitative Easing and the Hot Potato Effect:
    Evidence from Euro Area Banks
    Ellen Ryan & Karl Whelan
    Vol. 2019, No. 1

    For these reasons, the academic research on the impact of QE has tended to ignore the role played by large increases in the supply of reserves. Instead, as summarised by Christensen and Krogstrup (2016b), the literature has focused on two main channels through which QE could influence the econ-
    omy by affecting long-term interest rates. The first channel is a portfolio rebalancing effect driven by reduced availability of assets purchased by the central bank. This increases their price and reduces their yields via a lowering of term premia. The second channel is a signalling channel: If the portfolio balance channel is effective, then communication about the quantities of future bond purchases can provide a signal about when the central bank intends to normalise monetary policy and increase interest rates. Studies such as Gagnon et al. (2011), D’Amico and King (2013), Joyce et al. (2011) and Christensen and Rudebusch (2012) found that QE purchases had statistically significant but economically modest effects in reducing long-term interest rates, with the effects being a mix of these two channels. A typical conclusion was that the QE programmes depressed long-term bond yields by about 100 basis points.

NEWSROOM crewneck & prints