Monetary policy of the ECB, its concepts and tools

Transcription

1 Monetary policy of the ECB, its concepts and tools Frankfurt am Main, 20 September 2011 Markus A. Schmidt Directorate Monetary Policy 1

2 Disclaimer The views expressed are those of the presenter and should therefore not necessarily be viewed and not be reported as representing the views of the European Central Bank. 2

3 Outline The ECB s monetary policy Principles of the ECB s monetary policy Economic Analysis Monetary Analysis The monetary transmission process ECB s response to the crisis 3

4 Outline The ECB s monetary policy Principles of the ECB s monetary policy Economic Analysis Monetary Analysis The monetary transmission process ECB s response to the crisis Anything else? 4

5 ECB s monetary policy objective Article 127 of the Treaty of the Functioning of the European Union: The primary objective of the ESCB [Eurosystem] shall be to maintain price stability Without prejudice of the objective of price stability, the ESCB [Eurosystem] shall support the general economic policies with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. 5

6 ECB s quantitative definition of price stability The Governing Council [GovC] of the ECB in October 2008 defined price stability as a year-on-year increase of the Harmonised Index of Consumer Prices [HICP] for the euro area below 2%. Price Stability is to be maintained over the medium term. The GovC aims to maintain inflation rates at levels below, but close to, 2% over the medium term. 6

7 Why below, but close to, 2%? Below in order to fully reap the benefits of price stability. Close to to ensure an adequate margin that avoids risks of deflation, addresses implications of inflation differentials among euro area Member States and takes possible small measurement bias in HICP into account. 7

8 Why is price stability important Inflation is hampering the price mechanism (absolute-relative confusion, permanent-transitory confusion), is affecting the allocation of income (debtors vs. creditors, wagelag hypothesis) in case of non-anticipated inflation, causes a decrease in efficiency, even if inflation is anticipated, results in sub-optimal holdings of money, reducing households purchasing power. 8

9 Inflation s consequences for purchasing power Purchasing power of 100 Euro (2011) Purchasing power of 100 Euro (2011) Annual inflation rate of... 1% 2% 3% 4% 5% Source: ECB calculations.

10 Inflation and inflation expectations 5.0 Long-term inflation expectation (5y5y forward inflation swap rate) Medium-term inflation expectation (5y spot inflation swap rate) Short-term inflation expectations (1y spot inflation swap rate) HICP (annual growth rate, percentage points) Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Source: Bloomberg, ECB and ECB calculations. Latest observation: September 2011, end-of-month data (inflation swaps) and monthly data (HICP), percentage points. 10

11 Safeguards for sound monetary policy Institutional safeguards Clear mandate: Price stability as primary objective Independence from political influence Clear allocation of responsibilities Strategic safeguards Credible commitment towards mandate Consistent framework for analysis and decision-making Clear and transparent communication 11

12 The ECB s monetary policy strategy Primary objective of price stability Economic analysis Governing Council takes monetary policy decisions based on an overall assessment of the risks to price stability Monetary analysis Analysis of economic dynamics and shocks cross checking Analysis of monetary trends Full set of information 12

13 Key principles of the ECB s monetary policy strategy Forward-looking nature Medium-term orientation Broad-based analysis Cross-checking of analyses 13

14 Outline The ECB s monetary policy Principles of the ECB s monetary policy Economic Analysis Monetary Analysis The monetary transmission process ECB s response to the crisis Anything else? 14

15 Economic Analysis The Economic Analysis aims at identifying short- to medium-term risks to price stability. Forward-looking assessment of relevant information from a variety of indicators (e. g. business cycle, wages, exchange rate, asset prices, financial yields, fiscal policy, etc.). Quarterly macroeconomic projections for inflation and growth in the euro area, prepared by staff of the Eurosystem/ ECB 15

16 Economic Analysis The scope of the Economic Analysis are factors determining supply- and demand-conditions on goods markets, services markets, and factor markets [capital markets, labour markets]. It investigates shocks to the economy, the resulting dynamic processes as well as the perspectives stemming from that. 16

17 Economic Analysis Among the indicators relevant for Economic Analysis are price indicators, expenditure components, production indicators, sentiment indicators, labour market indicators and financial market indicators. 17

18 Outline The ECB s monetary policy Principles of the ECB s monetary policy Economic Analysis Monetary Analysis The monetary transmission process ECB s response to the crisis Anything else? 18

19 Monetary Analysis The Monetary Analysis aims at identifying medium- to longer-term risks to price stability. The basis of Monetary Analysis is the conviction that inflation is always a monetary phenomenon, at least in the long-run. Money has leading indicator properties for inflation in the euro area in the medium- to long-run. Regular monitoring of money and credit developments contributes to identifying emergence of unsustainable developments in asset prices. 19

20 Monetary Analysis M P M* P* t t M M * P P * M * M* P * P* t t 20

21 Monetary Analysis Monetary Analysis is mainly based on balance sheet data of the money-issuing sector, i.e. so-called Monetary Financial Institutions [MFIs]. Assets Credit to general government Loans Securities Credit to private sector Loans Securities Net claims on non-euro area residents Securities Liabilities Currency in circulation Overnight deposits Other short term deposits Marketable instruments Holdings of central government Longer term liabilities 21

22 Credit is the main source of monetary dynamics 14 Loans to the private sector (adjusted for securitisation) M Source: ECB. Latest observation: July 2011, monthly data, annual growth rates, percentage points Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

23 Outline The ECB s monetary policy Principles of the ECB s monetary policy Economic Analysis Monetary Analysis The monetary transmission process ECB s response to the crisis Anything else? 23

24 The monetary transmission process 24

25 25

26 Monetary transmission in normal times Overnight rate mirrors official key interest rate over maintenance period. ECB influences money market conditions by setting key interest rates and managing the liquidity situation in the banking sector by benchmark allotment. Banks with liquidity surplus lend to those with deficits over inter-bank money market. Government bonds play an important role as collateral and for the pricing of fixed income securities, hence availability is important. 26

27 Steering money market conditions Main refinancing operations Marginal lending facility Deposit facility Eonia (monhtly average) % 7 7 % Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Source: ECB. Latest observation: August 2011, monthly averages of daily observations

28 Steering money market conditions Long-term interest rate (10 y) Short-term interest rate (3 m) Eonia (monhtly average) % 6 6 % Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug Source: ECB. Latest observation: August 2011, monthly averages of daily observations

29 Outline The ECB s monetary policy Principles of the ECB s monetary policy Economic Analysis Monetary Analysis The monetary transmission process ECB s response to the crisis Anything else? 29

30 The financial turmoil and the money market Eurepo (3M) Euribor (3M) Depo-Repo-Spread (3M, RHS) % bp Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep Source: Bloomberg and ECB calculations. Last observation: 15 September 2011, daily observations

31 Impairment of the monetary transmission process 31

32 The ECB s response to the crisis Immediate response on 9 August 2007 Allowed banks to draw full amount of what they needed on overnight basis against collateral at the prevailing main refinancing rate (ca 95 bn) In the following months Supplementary refinancing operations with 3 and 6 months maturity Intra-maintenance period frontloading More frequent fine-tuning operations Provision of US dollar liquidity against euro-denominated collateral 32

33 Liquidity management measures Pre-crisis benchmark allotment Pre-Lehman frontloading [EUR billions] [EUR billions] /07/07 14/07/07 17/07/07 20/07/07 23/07/07 26/07/07 29/07/07 01/08/07 04/08/07 07/08/ /08/07 11/08/07 14/08/07 17/08/07 20/08/07 23/08/07 26/08/07 29/08/07 01/09/07 04/09/07 07/09/07 10/09/07 Daily current accounts Reserve requirements Daily current accounts Reserve requirements EUR [billions] Post-Lehman ample liquidity Reserve requirement Reserve holdings Recourse to deposit facility /12/08 14/12/08 18/12/08 22/12/08 26/12/08 30/12/08 03/01/09 07/01/09 11/01/09 15/01/09 19/01/09 Daily current accounts Deposit facility Reserve requirements EUR billions Source: ECB. 33

34 Decline in key interest rates by 325 bp in 7 months Main refinancing operations Marginal lending facility Deposit facility Eonia (monhtly average) % 6 6 % Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug Source: ECB. Last observation: August 2011, monthly averages of daily observations.

35 affected loans-rates, too! Short-term Long-term (floating rate and up to 1 year) (over 5 years) Small loans to NFCs Large loans to NFCs Loans for house pruchase Consumer credit Other lending Eonia (monhtly average) % % Small loans to NFCs 10 Large loans to NFCs Loans for house purchase (over 5 and up to 10 years) Loans for house purchase (over 10 years) Consumer credit Other lending % 10 Eonia (monhtly average) % Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Jan-07 M ar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 M ar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 M ar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 M ar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 M ar-11 May-11 Jul-11 Source: ECB and ECB calculations. Last observation: July

36 Further responses enhanced credit support ECB s enhanced credit support consisted of mainly bank-based measures to support the flow of credit beyond standard interest rate channel Fixed-rate full allotment Expansion of collateral Longer-term liquidity provision Liquidity provision in foreign currencies Financial market support through purchases of covered bonds 36

37 Temporary improvements Against background of improved money market conditions ECB introduced exit strategy from non-standard measures, as they were temporary by nature Non-continuation of purchases of covered bonds Partly withdrawal of liquidity provision in foreign currency Non-continuation of long-term liquidity provision No pre-determined sequence between the exit from nonstandard measures and interest rate action Assessment of risks to price stability primary criterion 37

38 5-year sovereign CDS spreads DE FR IT ES IE PT GR bp bp Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep Source: Bloomberg. Last observation: 14 September 2011, daily observations.

39 ECB s response to the sovereign debt crisis ECB introduced the Securities Markets Programme [SMP] to safeguard the well-functioning of the transmission process by conducting interventions in euro area debt securities markets. Purchases ensure depth and liquidity in dysfunctional securities markets and are conducted on secondary markets only. 39

40 ECB s response to the sovereign debt crisis ECB re-introduced some non-standard measures that had been phased-out earlier. Fixed-rate full allotment in 3M refinancing operations Temporary 6M refinancing operations Fixed-rate full allotment in USD (new) 40

41 Literature Monthly Bulletin The ECB s monetary policy stance during the financial crisis (January 2010) The ECB s response to the financial crisis (October 2010) Asset price bubbles and monetary policy revisited (November 2010) 41

42 Literature The Monetary Policy of the ECB 42

43 Literature The European Central Bank, the Eurosystem, the European System of Central Banks 43

44 Literature Price Stability: Why is it important for you? 44

45 Monetary policy of the ECB, its concepts and tools Frankfurt am Main, 20 September 2011 Markus A. Schmidt Directorate Monetary Policy 45