Despite the eurozone’s economic recovery, the European Central Bank’s (ECB) overall policy stance has remained accommodative. However, as economic expansion continues, a review of monetary policy tools within the bank’s current framework is required argues Silvia Dall’Angelo, Senior Economist at Hermes Investment Management. In her latest Ahead of the Curve, she assesses the factors influencing the uncertain path to monetary normalisation and discusses how policy may be reshaped.
QE & the law of diminishing returns
Our analysis suggests QE has had a significant impact on sovereign bond yields, with a reduction of between 70bps to 160bps across jurisdictions. The ECB has reached similar conclusions, indicating unconventional monetary policy measures have compressed long-term yields by about 100bps. In addition, the bank estimates that monetary policy measures introduced between mid-2014 and October 2017 will boost growth and inflation by about 1.9 percentage points between 2016 and 2020.
While the bond-buying programme has been effective, cost-benefit considerations suggest it is now an appropriate time to prepare for an exit from QE. Today, the marginal benefit of QE is modest, while its costs, in terms of distortions in financial markets and distributional effects, are high.