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News : EU Economy Last Updated: May 18, 2015 - 7:24 AM

Draghi will not end QE early but warns of risks
By Michael Hennigan, Finfacts founder and editor
May 15, 2015 - 8:14 AM

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Christine Lagarde, IMG managing director and Mario Draghi, ECB president, at IMF headquarters, Washington DC, May 14, 2015

<font color="#008000"><b>Christine Lagarde, IMG managing director and Mario Draghi, ECB president, at IMF headquarters, Washington DC, May 14, 2015 </b></font>

The European Central Bank president said on Thursday that the current program of bond buying known as quantitative easing or money printing, will not be ended early but he warned that central banks have to be aware of the risk that prolonged low interest rates and bond buying, could lead to financial instability and worsen income inequality.

Mario Draghi was speaking at a lecture at the IMF's headquarters in Washington DC and he said: "After almost 7 years of a debilitating sequence of crises, firms and households are very hesitant to take on economic risk. For this reason quite some time is needed before we can declare success, and our monetary policy stimulus will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis."

The current €1.1tn bond-buying program began in March and it involves:

  • Combined monthly asset purchases to amount to €60bn;

  • Purchases intended to be carried out until at least September 2016.

Draghi said in his lecture that a prolonged period of accommodative monetary policy can come with side effects. "And the fact that our policy has so far proven effective should not blind us to them."

"Because the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighed and where necessary mitigated,"  he said.

The ECB president added that while a period of low interest rates will inevitably result in some local misallocation of resources, it does not follow that it has to threaten overall financial stability. "This hinges crucially on monetary policy being embedded in a complementary set of supervisory and regulatory policies that create incentives for balance sheet adjustment and responsible financial behaviour."

He added: "Another concern, which has accompanied the fall of interest rates to their effective lower bound and the introduction of unconventional measures, is the distributional consequences of monetary policy. In particular, there have been concerns that very low rates for a prolonged period might penalise savers to the benefit of debtors; or that rising asset prices as a consequence of our purchases might benefit the wealthy disproportionately and thereby increase inequality."

Lecture transcript

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