FRANKFURT (Reuters) – The European Central Bank (ECB) should make a clearer distinction between instruments used to control inflation and those aimed at stabilizing financial markets, Dutch central bank governor and member Klaas Knot said on Thursday from the Frankfurt institution.
The rapid succession of crises over the last decade, from very low inflation to the COVID-19 pandemic and then the surge in prices, has forced the ECB to imagine new instruments. This situation has often created confusion over the principle according to which the policy tools of the monetary issuing institute should be separated from those used for financial stability.
“In the future, we may want to separate the instruments that guide the direction of monetary policy from those that support transmission,” Klaas Knot said in a speech in Paris.
“Distinguishing monetary guidance from safeguarding monetary transmission makes sense because these operations may need to be implemented in opposite directions,” added Klaas Knot.
Discussions over how the ECB uses certain instruments are intensifying as the bank prepares for a review of its strategy next year and seeks to learn lessons from the recent surge in inflation.
One of the key issues that will be raised is bond purchases, the ECB’s favored instrument for most of the last decade.
While bond purchases help stabilize markets quickly, the debt remains on the bank’s balance sheet for a long time. The ECB, which aggressively raised its rates to bring down inflation, is still sitting on trillions of euros in bonds purchased during the period when inflation was extremely low.
Some economists, such as Isabel Schnabel, member of the ECB Governing Council, believe that short-term and temporary purchases of financial securities must be maintained, while the massive purchasing program, known as “quantitative easing.” quantitative”), should be used with greater caution due to its long-term side effects.
According to Klaas Knot, the Transmission Protection Instrument (IPT), which could be used to mitigate the impact of disorderly and deemed unjustified increases in borrowing costs in the euro area, constitutes a good example of how tools can be implemented with greater distinction.
The governor of the Dutch central bank emphasizes that the simple existence of this safety net has calmed the markets and allowed the ECB to increase its key rates.
(Reporting Balazs Koranyi; Claude Chendjou, edited by Sophie Louet)
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