In a clear signal that it has no regrets about its decade-long arsenal of monetary support, the European Central Bank (ECB) is poised to reaffirm its landmark stimulus measures in an ongoing strategy review, ECB officials say. After grappling with surging inflation in 2021–22 and booking sizeable accounting losses as interest rates rose, the bank’s governing council appears determined to vindicate its aggressive bond-buying programmes, negative interest-rate regime and forward-guidance framework as core tools for future crises.

The confidential review—launched in March after being commissioned by ECB President Christine Lagarde—will leave largely intact the strategy adopted in 2021, retaining references to “especially forceful or persistent” action when price pressures threaten to dip below its 2 percent target. That phrase, widely understood within the institution as code for quantitative easing (QE), will remain in the updated strategy document, officials say, underscoring a collective judgment that asset purchases and other unconventional measures were vital to preserving price stability and financial cohesion during a decade marked by the eurozone sovereign-debt turmoil, pandemic shock and energy-price spike.

A series of retreats, most recently in Porto in early May, saw ECB staff present fresh analysis of the effects of its landmark programmes: the Asset Purchase Programme (APP), launched in 2015; the Pandemic Emergency Purchase Programme (PEPP), unveiled in 2020; and a suite of targeted long-term refinancing operations (TLTROs). According to internal assessments, these measures prevented the eurozone from sliding into deflation, supported lending to businesses and households, and capped borrowing costs for heavily indebted governments. Despite booking paper losses—stemming from the gap between low-yield bonds on its expanded balance sheet and today’s higher policy rates—the ECB’s leadership concluded that the benefits far outweighed the costs.

Little Appetite for Retrospective Critique

Although some national central bank governors pushed for a franker retrospective, the consensus view is that the review need not dwell on past missteps. Belgian Governor Pierre Wunsch advocated dropping the “forceful or persistent” clause altogether, arguing that perpetual reliance on QE risked fostering complacency. His Dutch counterpart Klaas Knot and German board member Isabel Schnabel urged more disciplined use of bond-buying in future. Yet in private conversations, several policymakers acknowledged that while shorter, targeted purchase programmes were preferable, retaining the option of large-scale asset intervention was indispensable during systemic shocks.

“History has shown that when inflation falls back toward zero—or when market fragmentation threatens the single monetary policy—these tools are an essential backstop,” said one ECB policymaker. “Our task now is to refine forward guidance and reshape our toolkit for a new era, but not to discard measures that proved their worth.”

The review does propose tighter guardrails around forward guidance—the practice of signalling future policy paths to influence market expectations. Critics within the ECB concede that earlier, overly explicit forward guidance may have lulled the bank into delaying rate hikes during the inflation surge, exacerbating price pressures. Moving forward, the strategy will likely advocate more conditional language, tying guidance explicitly to data thresholds and ensuring greater flexibility should economic conditions deteriorate.

Consistent with its 2021 update, the strategy will again enshrine a symmetric inflation objective of 2 percent over the medium term. This means both upside and downside deviations are equally problematic. Officials emphasize that the ECB will neither rush to tighten monetary policy at the first sign of overshooting nor risk prolonged below-target inflation by delaying action. A new section on “monetary policy in an environment of elevated uncertainty” will stress data dependency, scenario analysis and readiness to deploy the full toolkit as circumstances warrant.

Losses and Lesson-Drawing

The ECB’s expanded pandemic purchases left its balance sheet swollen to nearly €8 trillion, with national central banks collectively holding some €2.8 trillion in excess reserves. As policy rates climbed to 4 percent, the ECB began paying interest on these reserves at 2.25 percent, creating a substantial interest burden. While central banks do not operate to turn a profit, such losses reduce governments’ dividend income and can inflame political criticism. The strategy review is expected to add a new section on risk management and communication, aiming to bolster transparency around how losses are shared among the Eurosystem and how they affect national budgets.

Beyond conventional policy, the strategy will reaffirm the ECB’s commitment to incorporating climate change into its monetary policy framework. The review will restate that the asset purchase programmes will continue to consider climate-related risks in portfolio composition, adjusting corporate bond flows to align with the bloc’s net-zero ambitions. On the digital euro front, while not a monetary policy tool per se, a brief annex will highlight ongoing experiments with a central bank digital currency, noting its potential to complement—but not replace—existing policy transmission channels.

Policymakers view the updated strategy as laying the groundwork for more resilient crisis response. The 2021 review had already broadened the ECB’s mandate to encompass financial stability considerations; the latest update is likely to strengthen coordination with banking and fiscal authorities to ensure cohesive policy action during future emergencies. Emergency liquidity assistance—critical during the sovereign debt crisis—is also due for renewed emphasis, with a commitment to maintain standing facilities and ad-hoc interventions when systemic risks emerge.

While the review largely celebrates past stimulus, it also acknowledges the challenge of normalising policy. The strategy will expand discussion of “exit tools” such as the optional tiering of reserve remuneration, sterilisation operations, and balance-sheet caps. Officials hope these refinements will allow the ECB to raise rates and shrink its balance sheet without destabilising financial markets or impeding credit flows.

Financial markets have greeted news of the strategy review with relief. Euro-area bond yields and swap rates have eased, reflecting diminished concerns that the ECB would disavow its commitment to ample liquidity. Bank shares ticked higher on expectations of a measured approach to policy recalibration. Investors see a reaffirmed toolkit as reducing tail-risk scenarios of sudden liquidity shortages or splintered government bond markets.

On the political front, governments of heavily indebted southern member states have welcomed the likely endorsement of sustained support for sovereign debt markets. Meanwhile, more fiscally conservative capitals are carefully monitoring the debate over future bond-purchase limits and exit measures. The European Commission, which awaits the final strategy text, has indicated it will study the implications for Stability and Growth Pact rules and euro-area fiscal coordination.

With the formal strategy revision expected to be published in early summer, the ECB is charting a course of cautious continuity. By defending its expansive toolkit—while modestly refining forward guidance, exit mechanisms and risk management protocols—the bank aims to reassure markets that it remains ready to act decisively in the face of adverse shocks. For policymakers, the central challenge will be balancing the hard-won lessons of the past decade with the need to evolve for new economic realities, from digital currencies to climate imperatives. Yet the overarching message is clear: the ECB stands by its extraordinary stimulus legacy and will keep these policies front and center in its playbook for years to come.

(Adapted from FXStreet.com)

Categories: Economy & Finance, Regulations & Legal, Strategy