>> GROUP: Shadow ECB Council / EZB-Schattenrat  Dr. Elga Bartsch

Dr. Elga Bartsch: In terms of policy package, my preference would be for a 20 basis point reduction in the deposit rate combined with a tiering system to ease some of the concerns around the impact of the banking system and the ability to sustain negative interest rates for an extended period of time. In addition, I think the ECB should make clear that it maintains an easing bias and is not yet at the effective lower bound of policy rates. Beyond the cut in interest rates, the ECB should also restart its net asset purchases, I think. In my mind, a relative small amount of EUR 30 to 40 bn p.m. should sufficient provided that the programme runs at least for a year.

In terms of the effectiveness of the package, we need to bear in mind that at the end of the day all monetary policy measure – both conventional and unconventional – work through lower interest rates. Lowering rates stimulates demand by lowering the cost of financing. As policy rates approach their Effective Lower Bound, the scope for longer term rates to fall is limited, monetary policy is inching towards a liquidity trap. Should more than a tweak to the policy stance be required, for instance in the next downturn, a more radical rethink might be necessary. In this case, central banks would likely need to evolve their toolkit from unconventional monetary policy measures to an unprecedented coordination with fiscal policy.
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