By Szu Ping Chan at The Telegraph
The European Central Bank’s loose monetary policy risks destroying the European project, Deutsche Bank has warned.
In a blistering attack, Deutsche suggested the ECB had “los[t] the plot” and that its “desperate” actions raised the risk of a potentially “catastrophic” mistake by the central bank.
David Folkerts-Landau, Deutsche’s chief economist, said negative interest rates and quantitative easing had hurt savers and allowed politicians to delay badly-needed structural reforms.
“ECB policy is threatening the European project as a whole for the sake of short-term financial stability,” he said in a note titled “The ECB must change course”.
It said: “The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.
“The benefits from ever-looser policy are diminishing while the litany of distortions, perversions and disincentives grows by the day. Savers are punished and speculators rewarded. Bad companies survive while good companies are too scared to invest.”
The German economist also warned that the “whatever it takes” stance taken by president Mario Draghi and the ECB had “distorted the market-based pricing of government bond yields”.
The ECB slashed all three of its interest rates in March and ramped up its quantitative easing programme to €80bn a month, from €60bn in a bid to ward off deflation.
Mr Folkerts-Landau said: “After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma, broad-based quantitative easing and negative interest rates, risks the long-term stability of the eurozone.
“Worse, by appointing itself the eurozone’s ‘whatever it takes’ saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation.”
Mr Folkerts-Landau urged the ECB to “start to prepare a reversal of its policy stance” in the first quarter of 2017, when inflation is expected to climb above 1pc.
While this would still be well below the ECB’s target of just below 2pc, Mr Folkerts-Landau said this would “provide the opportunity for signalling a change”.
He said: “A returning to market-based pricing of sovereign risk will incentivise governments to begin growth-friendly reforms and to tackle fiscal stability.
“Flagging the move should dampen adverse reactions in financial markets”.
Lord King, the former governor of the Bank of England, has also urged governments to do more to boost growth and lift productivity, warning that “monetary policy has reached its limits”.
However, he warned against a sudden rise in interest rates, which he said would “just lead to another downturn”.
Writing in the World Gold Council’s latest publication for investors, he said: “If you repeatedly bring down interest rates to try and persuade people to spend today rather than tomorrow, it works for a while.
“But they become increasingly resistant to being asked to spend their resources now rather than save for the future.
“And the longer domestic spending is in excess of potential output, the more you have to borrow from the rest of the world to finance it. Eventually people wake up to the fact that this is unsustainable and then you get a sharp adjustment downwards.
“Governments really have to do something to boost people’s beliefs in their future income, so they need to put in place a sustainable programme of improving productivity over the next 10 to 20 years.”