Heisenberg Report

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