In a broadcast from BNR Nieuwsradio, Casper de Vries, Professor Emeritus of Monetary Economics at Erasmus School of Economics, discusses the monetary and fiscal policy of the European Central Bank. One of the most powerful instruments, the interest rate instrument, has to be dealt with very carefully, according to De Vries.
Previously, the European Central Bank focused mainly on easing monetary policy. However, today the focus has shifted to tightening monetary policy. In doing so, the European Central Bank mainly uses the interest rate instrument. However, the effect of this instrument diminishes when interest rates are around zero. 'The instrument has then become blunt, because you cannot bring interest rates too far below zero,' the Professor Emeritus says.
Still, there is another solution: buying bonds. The European Central Bank is ramping up interest rates because of rising inflation. Selling bonds held by the central bank will make interest rates rise even harder. ‘Selling the bonds also affects the long-term and that could create quite a lot of imbalances in the bond market,’ De Vries fears.
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You can listen to the full broadcast from BNR Nieuwsradio, 1 March 2023, here.