In Amsterdam on Friday, Dutch central bank chief Klaas Knot urged the European Central Bank to use bond purchases more cautiously in the future, citing costly side effects. Knot emphasized that while substantial bond buying was aimed at boosting inflation, with over 4 trillion euros still in the ECB's possession, its lingering impact on market prices needs to be addressed post-stimulus.
Given the mixed outcomes of previous bond purchases, policymakers, as part of the ongoing review, may need to define a response plan for potential scenarios. Knot, the longest-standing member on the ECB's Governing Council, advocated for short but potent quantitative easing measures to swiftly influence market dynamics and sentiment.
Expressing a similar sentiment, ECB board member Isabel Schnabel highlighted the need for a higher threshold for initiating QE, cautioning that unwinding bond holdings gradually could distort asset valuations significantly over an extended period. Knot suggested that bond purchases are most impactful when inflation deviates significantly from the target, diminishing in relevance as inflation nears its goal.
Summarizing his stance, Knot stressed that although QE can be vital to avert deflation risks, its prolonged use should be restricted due to evolving trade-offs between benefits and drawbacks. He also acknowledged that QE's effectiveness in fine-tuning inflation has been limited, while underscoring potential repercussions like distorted asset prices, resource misallocation, and risks to the central bank's balance sheet.