Is There A Limit To Central Bank Intervention?

The position of the ECB on TLTROs III could be less generous than expectedA central bank's actions should aim at neutrality

Alphavalue | The answer to this complex question is yes. Our analysts believe there is a limit to central bank intervention. This is not determined by economic or financial rules, but by politics. Ignoring that limit would violate democracy. The next question is: have some central banks already crossed the limit?

The massive injection of liquidity by central banks in the wake of the Covid-19 pandemic has raised the important question of their limit, if any. Former ECB President Mario Draghi, replaced by France’s Christine Lagarde, gave a clue to this complex question when he spoke at a press conference about “helicopter money.”

He replied that this option was outside the ECB’s mandate, as it was a fiscal and not a monetary tool. In other words, a central bank can do what it wants (or what is necessary) as long as its actions cannot be seen as fiscal moves. Why? Because fiscal operations can only be carried out with the consent of citizens. A central bank, particularly the ECB, as an independent body and non-elected through direct voting, is not allowed to take fiscal decisions. The recent dispute between the German Constitutional Court and the ECB is a reminder of the political limits to a central bank’s actions.

Of course, the line between monetary and fiscal policy is a very thin one. If a central bank aims at neutrality, its actions are often seen as favouring some agents at the expense of others (for example, savers versus debtors).

However, as Mario Draghi recalled, there is a clear limit to a central bank’s operations. These should never result in losses and drive equity capital into negative territory (which is the case when it comes to “helicopter money”). In fact, a negative equity situation corresponds to an increase in the state’s debt (as the holder of the equity goes from being the claimant to a debtor position), decided unilaterally and prohibited by the central bank itself.

Under normal conditions, a central bank protects itself against possible losses by applying cuts to the assets it buys, thus discounting only the derisk- free part. Have some central banks already crossed that limit?