SINTRA, Portugal (Reuters) – European Central Bank officials are calling for a review of nearly a decade of quantitative easing (QE) aimed at boosting inflation, saying the measures have done more harm than good, sources told Reuters.

At least six policymakers told Reuters that there is a need for possible changes to the ECB’s operating framework, which provides for “strong and persistent” measures when interest rates are at their lowest.

This issue is expected to be discussed during the ECB’s long-planned strategy review, which is about to start and end next year.

“We bought billions of euros upon billions of euros of assets without succeeding in bringing inflation back to its target,” one of the sources points out. “Years later, more than 3,000 billion euros of excess liquidity remain, so these measures have committed us for years.”

The ECB has bought around 5,000 billion euros of bonds over nearly 10 years, while offering zero-interest loans to eurozone banks.

While the issue seems less pressing now that inflation has returned close to target with rising interest rates, it has nevertheless been revived by recent comments from the Bank for International Settlements (BIS), which last week criticised quantitative easing measures.

“The BIS has created a storm this weekend, and I think the institution is right: we need to think about how we use some of our tools,” one official told Reuters.

The ECB declined to comment.

The BIS believes that ultra-accommodative monetary policies have put downward pressure on yields and led to perverse effects, including excessive risk-taking and the emergence of financial risks.

“These risks were not fully taken into account when the measures were first introduced,” the BIS said in a report.

Central banks could have instead tolerated below-target inflation because the costs would have been lower than those of quantitative easing programs, the sources said.

APPROPRIATE RESPONSE?

The ECB ended its asset purchase programme and targeted refinancing operations (TLTROs) in 2022 and has been reducing its bond holdings since last year.

But €3 trillion of excess liquidity remains in the system even after a series of sharp interest rate hikes, and it could take another five years before this liquidity is fully absorbed.

All sources consulted by Reuters believe that asset purchases are justified in the event of a shock, such as during the COVID-19 pandemic when the ECB launched a dedicated emergency programme, the PEPP.

Some of them also justify the ultra-accommodative policy pursued for a decade, believing that it was an appropriate response given the information available at the time to avoid deflation harmful to the economy.

However, others believe that asset-based financing should not be implemented on such a scale and over such a long period, especially when it comes to solving a structural problem that depends more on the fiscal policies of governments than on the monetary policy of the ECB.

The ECB is likely to keep a symmetrical approach to its 2% inflation target, but some said the commitment to “strong and persistent” measures when rates are at the floor should be removed, according to six sources interviewed by Reuters.

“I have had doubts about quantitative easing and have for a long time,” Irish central bank governor Gabriel Makhlouf told Reuters.

“I think QE has played a positive role in supporting employment during periods of very low rates, but I’m not sure what its impact is on asset prices, on wealth or inequality, and whether we understand the impacts of the program well enough to be able to say that it has been, overall, positive,” he sums up.

(Report by Balazs Koranyi, by Corentin Chappron, edited by Blandine Hénault)

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