ECB’s asset buys do little for inflation: Bundesbank research

The European Central Bank’s 2.3 trillion euros worth of asset buys propped up growth but failed to boost inflation and may have actually increased risks to financial stability, research published by the Bundesbank on Friday showed.

The conclusions of the paper support the long held views of the German central bank that bond purchases, commonly known as quantitative easing, were unnecessary and should be phased out without delay, ending the ECB’s biggest foray yet into unconventional monetary policy.

“We find that ECB balance sheet policies, in the form of direct asset purchases, bring down financial stress for some periods after the shock,” the paper concluded. “This positive effect is reversed thereafter as stress increases above its pre-shock level.”

“At the same time, asset purchase shocks have an expansionary effect on economic activity, while the effect on prices remains insignificant,” said the authors, whose view does not necessarily represent the views of the Bundesbank.

With the asset buys due to expire at the end of the year, policymakers will debate this autumn whether to extend bond purchases into 2018 or wind down the scheme.

While stimulus has pushed growth above 2 percent, more than twice what is considered the euro area’s potential, inflation is still weak and will miss the ECB’s target of almost 2 percent for years to come, leaving policymakers with a dilemma.

The Bundesbank has long argued that asset buys not only skirt the rules prohibiting central banks from financing budgets, they distort markets potentially leading to asset bubbles and do little for inflation.

“Our analysis shows that, while output effects in the euro area and Germany are positive, there are indications of increasing risks to financial stability,” the research added.

The paper argued that given ample liquidity provided by the ECB, commercial banks reduce loan write-offs and engage in more risky lending, ultimately leading to higher financial stability risks.