ECB May Aid Rich If Rates Rise Before QE Ends, Schnabel Says

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The European Central Bank would risk exacerbating inequality if it were to raise interest rates before ceasing asset purchases, according to Executive Board member Isabel Schnabel. 

Such a scenario is one example of how considerations of the broader impact of monetary policy should feature in decision-making, Schnabel told a conference Tuesday organized by the U.S. Federal Reserve. She highlighted the risk that hiking rates while continuing bond buying could disproportionately benefit richer people because of the assets they hold. 

“One reason for ending net asset purchases before raising policy rates has to do with the potentially adverse distributional consequences of reversing the order,” Schnabel said. Otherwise “central banks would be willingly accepting losses on their balance sheets that would ultimately lead to losses for the average taxpayer, and the continuation of net asset purchases would benefit mostly wealthier households.”

Schnabel’s emphasis of how inequality considerations should feature in ECB thinking contrasted with earlier comments from Fed chief Jerome Powell, who acknowledged existing disparities in the U.S. economy while cautioning that “most entrenched inequities are beyond the power of monetary policy to address.” 

“Central banks therefore have a duty to integrate such considerations into their decision-making process as part of their regular proportionality assessment, so as to choose a set of policy instruments that ensures their mandate is fulfilled while minimizing the potential distributional effects of monetary policy,” Schnabel said.

The ECB’s negative interest-rate policy has particularly faced criticism in her native Germany, where inflation rose at the fastest pace in nearly three decades in October. New forecasts for the economy will be published by its Council of Economic Advisors at 10:30 a.m. Frankfurt time.

Wrong Focus

Schnabel spoke on a panel alongside Bank of England Governor Andrew Bailey, who said political dialog in the U.K. criticizing the effect of quantitative easing on inequality isn’t “well focused commentary.” That idea, he said, ignores how unemployment would be higher without QE. 

The most apparent example of U.K. inequality isn’t within income groups but between generations, Bailey said, citing how Britons born in the 1980s were the first to be worse off than their predecessors. 

The governor said financial-stability policies may be more emotive because of affordability limits that the BOE imposes on mortgages. “Monetary policy does not have quite the same impact as ‘Can I buy that house or can’t I?’” he said.

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