The European Central Bank (ECB) is set to maintain its aggressive stimulus policies from the past decade, despite calls for self-criticism following a period of high inflation and substantial losses, according to several ECB officials who spoke to Reuters.
The ongoing strategy review, which started in March, will tackle key questions about the ECB’s future operations. It will evaluate the effectiveness of tools like large-scale bond purchases, negative interest rates, and forward guidance on rate hikes. While the review will touch on these issues, insiders suggest that the ECB will largely uphold its previous strategies, making only minor updates to its policy framework, which was last revised four years ago. The bank is unlikely to criticize the measures it took during the inflation spike of 2021-2022.
Key elements of the ECB’s stimulus approach, such as “especially forceful or persistent” actions—including quantitative easing (QE) bond-buying—are expected to remain in the policy document. These measures are considered essential when inflation and interest rates are low, according to sources who requested anonymity due to the ongoing nature of the review.
While some ECB officials, such as Belgian central bank governor Pierre Wunsch, have called for the removal of certain clauses supporting aggressive stimulus, others—like Dutch central bank head Klaas Knot and German ECB board member Isabel Schnabel—have suggested a more cautious approach to bond purchases in the future. They argue that short-term QE is effective, but prolonged measures become too costly.
At a recent retreat in Porto on May 6-7, ECB policymakers were presented with a draft of the strategy document. While some governors expressed dissatisfaction with the preliminary conclusions, hoping for a more critical review, there was general consensus on the document’s direction. Changes suggested at the retreat will be incorporated, with the final document expected in early summer.
The ECB’s staff presented an analysis showing that its stimulus programs had been beneficial and should remain part of the bank’s toolkit. However, the review did suggest that “forward guidance” on interest rates should be used more cautiously, acknowledging that the ECB’s delayed response to inflation in 2021-2022 was partly due to reliance on this tool.
The review is expected to reaffirm the ECB’s commitment to its 2% inflation target, emphasizing that both inflation overshoots and undershoots are equally undesirable. It will also highlight the high levels of uncertainty the bank faces as it operates in an unpredictable economic environment.
The ECB’s previous bond-buying programs, designed to combat deflation, have led to significant losses as inflation and interest rates have risen. The central banks of the euro zone are currently paying 2.25% interest on approximately €2.8 trillion worth of reserves. While central banks are not focused on profit, such losses can limit government dividends, attract criticism, and ultimately harm public confidence in the institution.
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