The committee’s report also notes that the beneficial effects of QE beyond the short term are more doubtful than central banks have assumed. This is a striking example of what the UK House of Lords’ Economic Affairs Committee in 2021 called the ‘ratchet-up effect’: QE rises with every adverse shock but is not withdrawn subsequently. With Covid-19, QE restarted at full speed: liquidity, virtually zero in pre-crisis times, is now as high as €4tn, some 30% of the euro area’s gross domestic product. After the financial crisis, the large-scale asset purchases (quantitative easing) produced a chronic excess of bank liquidity. Before 2008, it was usual practice to leave the banking system short of liquidity and refinance it through frequent repurchase operations. In the last 15 years, the ECB, like other central banks, changed its operating framework. The consequences may later hit back at the central bank where it hurts most: its independence. On the surface, this seems like a sideshow, but in fact it hides trouble in the making. Klaas Knot, governor of De Nederlandsche Bank and an influential member of the ECB governing council, stated that the interest rate rise is now ‘at the beginning of the second half’, following an increase of 2.5 percentage points from July to December 2022.Ī separate and scarcely debated issue is how this will be done. She reiterated this warning on 19 January. ECB President Christine Lagarde said in the December press conference that the situation ‘predicates another 50 basis point rate hike at our next meeting, and possibly at the one after that, and possibly thereafter’. ![]() The European Central Bank’s policy orientation – a rapid series of small interest rate increases to rein in inflation – is now clear.
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