THE IMPACT OF THE ECB s DECISIONS ON THE MONETARY DEVELOPMENT IN THE EUROAREA 1

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1 THE IMPACT OF THE ECB s DECISIONS ON THE MONETARY DEVELOPMENT IN THE EUROAREA 1 Jana Kotlebová University of Economics Faculty of National Economy Dolnozemská cesta Bratislava Slovakia hajnikov@dec.euba.sk telephone: Abstract At the present time many discussions are being held about the Eurosystem s strategy of monetary policy. In the 21 st century two phenomena in monetary policy are known the independence of the central bank and the inflation targeting. The issue of this article is to explain how the decisions of the ECB influence the monetary development in the eurozone. The main attention is paid to relations between the development of monetary aggregate M3 and other monetary policy objectives. Keywords: monetary policy, monetary aggregates, demand of money, money supply, price stability JEL codes: E52, E31, E41, E42, E5, E51, E58 1. Introduction In 23 the ECB decided to change its strategy of monetary policy, the first pillar being the economic analysis and the second the monetary analysis. From the start of monetary union the ECB declared its objective of monetary policy as price stability in conditions of annual rate of harmonized index of consumer prices that is close, but less than 2 %. What are the current measures of monetary development at the present time? 2. Changes of Member Structure of ESCB and of Eurosystem In 27 the European System of Central Banks has consisted of 27 national central banks of member states of the European Union and the European Central Bank. Eurosystem is 1 Ing. Jana Kotlebová, PhD. this article is a part of grant VEGA 1/2552/5 Europe like a international financial centre and perspectives of Slovak republic as his part 418

2 a working term for members of the eurozone and it consists of 13 national central banks (last one is Banka Slovenije) and the ECB. Table 1 Capital subscription of the ECB National Central Bank Decision of ECB from The structure of the ECB s capital Decision of Subscribed Paid-up capital from ECB from capital from % % EUR EUR Banque Nationale de Belgique 2,552 2, , ,56 Deutsche Bundesbank 21,1364 2, , ,19 Bank of Greece 1,8974 1, , ,85 Banco de Espaňa 7,7758 7, , ,9 Banque de France 14, , , ,42 Central Bank and Financial,9219, , ,6 Services Authority of Ireland Banca d Italia 13,516 12, , ,9 Banque centrale du,1568, , ,53 Luxembourg De Nederlandsche Bank 3,9955 3, , ,6 Oesterreichische Nationalbank 2,8 2, , ,78 Banco de Portugal 1,7653 1, , ,22 Suomen Pankki 1,2887 1, , ,11 Banka Slovenije,3345, , ,77 EMU 71,498 69, , ,81 Česká národní banka 1,4584 1, , ,87 Sveriges Riksbank 2,4133 2, , ,26 Danmarks Nationalbank 1,5663 1, , ,92 Eesti Pank,1784, , ,37 Central Bank of Cyprus,13, , ,84 Latvijas Banka,2978, , ,6 Lietuvos bankas,4425, , ,4 Magyar Nemzeti Bank 1,3884 1, , ,33 Bank Centrali ta Malta/Central, , ,81 Bank of Malta,647 Narodowy Bank Polski 5,138 4, , ,83 Národná banka Slovenska,7147, , ,95 Bank of England 14, , , ,67 Banca Nationala a Romaniei - 2, , ,89 Bulharská národná banka -, , ,99 Non-member EMU 28,592 3, , ,19 EU , , Source: Autor s calculation based on the info from 419

3 3. The Impact of the ECB s Decisions on Monetary Development in Euroarea For the reasons of operational management of the currency policies in the eurozone, the European Central Bank establishes the concrete key interest rates: the minimum bid rate of main refinancing operations, the interest rate of marginal lending facility and the interest rate of lending facility. They are announced always the first day of the new period for retaining the required minimal reserves (in the past the first day after the Board of Governors of the ECB meeting) to prevent the expectation of changes in the interest rates by the market participants and to stabilize the demand for the main refinancing operations. Chart 1 Key ECB interest rates 7, 6, 5, % p. a. 4, 3, 2, 1,, IV/99 VI X/99 I/ IV/ VII/ X/ I/1 IV/1 VII/1 X/1 I/2 IV/2 VII/2 X/2 I/3 IV/3 VII/3 X/3 I/4 IV/4 VII/4 X/4 I/5 IV/5 VII/5 X/5 I/6 IV/6 VII/6 X/6 I/7 IV/7 VII/7 interest rate of deposit facility interest rate of marginal lending facility minimum bid rate of main refinancing operations Source: Author s calculation based on the info from When the liquidity is high the interest rates are raised, on the other hand when there is a need on the market to supply liquidity, the interest rates are lowered. At the same time the negative influences on the development of inflation are being checked and possibly eliminated. 42

4 Chart 2 Main and longer term refinancing operations of Eurosystem VI I/ VII/ I/1 VII/1 I/2 VII/2 I/3 VII/3 I/4 VII/4 I/5 VII/5 I/6 VII/6 I/7 mld. EUR main refinancing operations longer term refinancing operations Source: Author s calculation based on the info supplied by To achieve the goals of the currency policies, the ECB employs the tools of the currency policies that are mostly of the market character. These are: the open market operations, the minimal reserves, the standing facilities and the foreign exchange interventions. Out of the group of the open market operations, the main refinancing operations with maturity and frequency of one week have the greatest influence on the development of liquidity (see chart # 2). They are realized in the form of tenders. The ECB monitors daily the demand for liquidity on the market and this info is then utilized when preparing them. On the days of announcement of the main refinancing operations the ECB establishes a prognosis for the independent (autonomous) factors of the monetary base and on the day of the tender realization it updates this prognosis, announcing at the same time the benchmark volume, which is the sum of money the ECB wishes to be invested in these operations. This procedure of predicting liquidity makes the demand for uninterrupted required minimal reserves possible. 421

5 Chart 3 Growth rates of M1, M2 and M IV/99 VI X/99 I/ IV/ VII/ X/ I/1 IV/1 VII/1 X/1 I/2 IV/2 VII/2 X/2 I/3 IV/3 VII/3 X/3 I/4 IV/4 VII/4 X/4 I/5 IV/5 VII/5 X/5 I/6 IV/6 VII/6 X/6 I/7 IV/7 % M1 M2 M3 Source: Author s calculation based on the info The strategy of the single monetary policy is based on two pillars, which are the economic and monetary analyses. The monetary analysis evaluates the development of the monetary aggregate M3. As is seen in chart # 3, the aggregates M2 and M3 developed during the whole researched period almost identically as opposed to the more liquid M1, which showed more pronounced deviations. During 26 the monetary aggregate M3 exhibited faster growth than M2 and aggregate M1 was on a decline. In May 27 the indicator of the annual percentual rate of growth for the aggregate M3 reached the record 11.7%. The high growth of the M3 dynamics indicates that the economic subjects prefer investments in the long term form of money as apposed to the more liquid forms. Based on this we can conclude that the trust in the Euro is growing. When researching the counterparts of M3 it is possible to see that the market participants prefer investments in the long term forms of money with the maturity up to two years as opposed to other long term forms of liabilities, because they represent the lower level of risks with the same or similar yield. 422

6 4. Conclusion From the start of the monetary union in Europe, the Eurosystem has created favourable conditions for its members to increase the standard of living of their citizens. This is viewed as a positive development in the Euro s exchange rate against the American dollar. In spite of the different inflation pressures, the average annual rate of inflation in the eurozone fluctuates very closely under the rate of 2%, which is, according to the ECB, the limit of the price stability. The rapid growth of the monetary aggregate M3 represents the potential threat to the price stability from a short period point of view, provided that this growth in the stock of money is liquidated into consumption. On the other hand, with the increase in the investments and with the growing price of commodities on the world markets, the longer term negative pressures on the inflation rate are arising. It is recommended that the Eurosystem still closely watches the development of the monetary aggregates in the near future, not only their structure, but their counterparts as well, since they can signalize the changes in the ownership of money by different economic subjects. The results of this process will help to analyze the development of demand on the global scale. Chart 4 Development of HICP and Exchange Rate of EUR/USD 4 1,6 3,5 1,4 3 1,2 HICP % 2,5 2 1,5 1,8,6 1,5 VI/9 X IV/ IX/ II/1 VII/ XII/ V/2 X/2 III/3 VIII/ I/4 VI/ XI/4 IV/ IX/5 II/6 VII/ XII/ EUR/USD V/7,4,2 HICP EUR/USD Source: Author s calculation based on the info 423

7 References [1] HANSPETER K. SCHELLER: The ECB history, role and functions, 2nd revised edition, Frankfurt am Main 26, Access from < [2] KOTLEBOVÁ, J.: Menový vývoj v eurozóne od r po súčasnosť. Medzinárodná vedecká konferencia Smolenice September 27 (The Currency Development in the Eurozone from 1999 to the present. International Scientific Conference.) [3] KOTLEBOVÁ, J.: ECB a riadenie likvidity bankového sektora v európskej hospodárskej a menovej únii. Habilitačná prednáška ISBN , september 27 (The ECB and the Liquidity Management of the Bank Sector in the European Economic and Currency Union. Habilitation lecture.) [4] KOTLEBOVÁ, J. SOBEK, O.: Menová politika stratégie, inštitúcie a nástroje. ISBN , IURA Edition Bratislava 27 (The Currency Policies Strategies, Institutions and Tools) [5] 424