FRANKFURT – The European Central Bank should not change the sequence of its future policy moves, even if that risks pushing up government borrowing costs, but may need a backstop to prevent market fragmentation, board member Isabel Schnabel said on Wednesday.
The ECB has long stipulated that an interest rate hike will only come “shortly after” quantitative easing ends, but some academics and policymakers are now entertaining the idea of switching the sequence of the two moves, partly to keep long term borrowing costs down even when short term rates rise.
“Maintaining a high volume of asset purchases merely to avoid adjustments in long-term yields in spite of imminent risks to price stability would give way to fiscal and financial dominance,” Schnabel said in a speech.
However, the 19-country euro area is prone to fragmentation because its financial architecture is incomplete so policy ECB adjustments could be amplified in some countries, pushing up borrowing costs more than intended, Schnabel warned.
“A credible backstop that commits to counter such risks of fragmentation may help protect against disorderly movements and thereby allow the central bank to focus on its price stability mandate,” she said.
The 1.85 trillion euro Pandemic Emergency Purchase Programme fulfilled such a function over the past two years, Schnabel said, but the scheme is scheduled to end next March.
Some policymakers have proposed setting up a similar but dormant scheme that would be activated to temper fragmentation, while others have suggested that the emergency scheme could be extended beyond March and allowed to run in the background with volumes ramped back up in case of market turbulence.
(Reporting by Balazs Koranyi; Editing by Catherine Evans and Alex Richardson)