(Bloomberg) -- The European Central Bank may resort to yield-curve control if a surge in government borrowing costs damps the impact of interest-rate cuts, according to ING.

Carsten Brzeski, the Dutch bank’s chief euro-zone economist, said there’s a possibility of central banks trying to cap yields, an experimental tool most notably deployed in Japan and Australia previously.

While that’s not his base-case scenario and what he describes as a “bold call,” Brzeski said euro-area policymakers may find their attempts to stimulate the economy blunted by high bond yields caused by debt-funded investments.

“Central banks monetarizing debt could really be on the cards in the next few years,” he said.

Rate-setters are likely to intensely debate which policy tools they can use in the coming years if they deplete their interest-rate ammunition and cuts fail to bring down parts of the yield curve. 

While many central banks used quantitative easing and negative rates in the 2010s, there’s skepticism about resorting to such stimulus again. Rather than purchasing a set amount of bonds, like in QE, under yield-curve control central banks buy enough government debt to achieve a specific yield target.

The Bank of Japan ended its yield-curve control program this year after beginning in 2016.

“There will be a moment, especially in the European context, where I could see as a bold call the ECB having to stabilize the yield curve,” Brzeski told a briefing Wednesday in London. “As a central bank, you want to go lower, you want to stimulate the economy.”

He said, however, that government investments funded by debt may cause “higher bond yields so the transmission of monetary policy isn’t really as it should be.” Brzeski pointed to the ECB’s Transmission Protection Instrument as a possible way of controlling yields that’s already within its toolbox.

Central banks may be forced to use a more limited policy tool to lower bond yields given the higher risk of reigniting inflationary pressures.  

Many officials have cooled on the idea of unconventional instruments in recent years, as they switched away from an ultra-accommodative stance to tackle inflation.

It’s come after concerns of damaging side effects from QE and negative rates. Critics say sub-zero borrowing costs are counterproductive as they hurt banks, while QE has come under fire in the UK due to the high fiscal cost.

ING’s UK economist, James Smith, said it’s less likely that the Bank of England would turn to some form of explicit yield-curve control, though he said its response to the crisis caused by Liz Truss’s short-lived premiership in 2022 was “inching in that direction.”

“It’s maybe a bit harder in the UK,” Smith said. “You could imagine the BOE at the very least curtailing QT and if not, doing a bit like what it did before with a temporary period of bond buying.”

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