The ECB Must Prove its Neutrality in Monetary Policy as it Phases Out the Asset Purchase Programme

As expected, the European Central Bank (ECB) has not made any changes to its interest rate policy in its latest decision. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW) in Mannheim, explains the ECB's decision.

“After the bank’s significant announcement last month that it would be phasing out its asset purchase programme, it is only right that the ECB Governing Council has chosen not to make any further decisions. Anything else would constitute inappropriately hasty monetary policy. After the summer break, however, the ECB needs to swiftly deal with specifying what the phase-out of asset purchases is going to look like. There are still many key decisions over the finer details that need to be made.

The only thing that is clear so far is that maturing bonds are to continue to be replaced by new purchases for some time to come. What is unclear is how these replacement purchases will be distributed. Italy and Spain’s share of the ECB capital key is set to decrease considerably when it is recalculated in 2019.This should imply that maturing bonds from these countries must be replaced by purchases from other Eurozone countries. In the coming months, the ECB will therefore have the chance to prove that its asset purchase programme is neutral in terms of monetary policy and that it is not merely running a financing programme solely for the benefit of Eurozone countries in high levels of debt.”

For more information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621-1235-149, E-mail friedrich.heinemann@zew.de