— Governing Council member Isabel Schnabel suggests limited scope for further rate cuts, QE
By Laurie Laird
LONDON (MaceNews) — A top European central banker acknowledged Friday the bank’s limited scope for further rate cuts and asset purchases, suggesting the ECB communicate its commitment to extend policy support over the longer term.
“When financing conditions are at a level that incentivizes all sectors of the economy to consume and invest, monetary policy can best support the economy by shifting its focus away from instrument activism — this is, from the intensity with which it uses the available array of instruments — and toward the duration of policy support,” said Isabel Schnabel, a member of the ECB’s Governing Council.
Addressing a virtual meeting of the European Fiscal Board on Friday, Schnabel acknowledged “some room” for further cuts in official European rates, but stressed that the “effective lower bound” of interest rates “is likely to remain a recurring constraint in the future.” The eurozone marginal lending rate has remained at -0.5% since before the onset of the pandemic.
Schnabel also suggested that the ECB may face diminishing marginal returns from any future expansion of quantitative easing. “The risk-free yield curve has become very flat — much flatter than in the United States. As a result, there is less scope for asset purchases to further compress term premia and thus long-term yields.”