Published by Global Banking & Finance Review®
Posted on January 31, 2025
2 min readLast updated: January 26, 2026
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Klaas Knot advises the ECB to limit future bond purchases due to their costly side effects, as the ECB reviews its strategy.
FRANKFURT (Reuters) - The European Central Bank should use bond purchases more sparingly in the future given costly side effects, Dutch central bank chief Klaas Knot said on Friday just as the ECB is starting a strategy review.
The ECB bought trillions of euros worth of debt over the past decade in the hope of rekindling inflation when it was too low, and there is still more than 4 trillion euros of bonds left on its books, impacting market prices years after the need for stimulus has ended.
While ultra low inflation is now a distant prospect, policymakers may outline as part of the review how they would respond to such a scenario given the mixed success of past bond purchases.
Knot, the longest-serving policymaker on the ECB's rate-setting Governing Council, argued that bond buys, commonly known as quantitative easing, should be short but powerful to make an immediate impact on market pricing and sentiment.
"My personal preference in such cases would be to employ QE forcefully when needed to avoid deflationary risks, but to avoid using it overly persistently, as I believe the balance of benefits and costs to shift over time," Knot said in a speech in Amsterdam.
His comments echo views expressed by ECB board member Isabel Schnabel, who earlier argued that the bar for starting QE should be higher than in the past since bond holdings can be unwound only gradually and will thus distort asset prices for a long time.
Knot also said that bond purchases are more effective when inflation is far below the target, and the case for its application fades as inflation gets close to target.
"QE has not been very effective in fine-tuning inflation. At the same time, asset purchases come with potential side effects, such as inflated asset prices, misallocation of resources, and risks to the central bank balance sheet."
(Reporting by Balazs Koranyi; editing by Mark Heinrich)
Klaas Knot suggests that the European Central Bank should use bond purchases more sparingly in the future due to their costly side effects.
The ECB has bought trillions of euros worth of debt over the past decade, with more than 4 trillion euros of bonds still on its books.
Knot mentions that bond purchases can lead to inflated asset prices, misallocation of resources, and risks to financial stability.
Knot believes that bond purchases are more effective when inflation is significantly below the target and that their effectiveness fades as inflation approaches the target.
Knot's personal preference is to employ quantitative easing forcefully when necessary to avoid deflationary risks, but to avoid persistent use due to the balance of benefits and costs.
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