Monetary Policy and Financial Stability Challenges Where does the Region Stand? Vice Governor Anita Angelovska-Bezhoska

Transcription

1 Monetary Policy and Financial Stability Challenges Where does the Region Stand? Vice Governor Anita Angelovska-Bezhoska Bečići, September, 2016

2 Monetary policy in global context Since the burst of the crisis, unprecedented monetary stimulus to affect financial and economic conditions. Experimenting with unconventional tools - balance sheet policies, forward guidance, negative rates. Has the monetary stimulus served the purpose? - output growth remains weak and inflation stubbornly low

3 Monetary policy in global context The new puzzling reality has triggered more profound questions concerning the monetary policy frameworks: Objectives: Should we take into account financial issues when deciding on monetary policy? Should it be fully left to macro prudential policy? Strategy: is the flexible IT strategy flexible enough, or we should perhaps consider other strategies-targeting price level or nominal GDP? Policy instruments: Will the unconventional tool kit be temporary or will they become conventional? Some of the instruments blurred the lines between the monetary and fiscal policy. For how long the interest rates will remain low? Has the natural level of interest rate declined substantially, driven by changes in saving and investment fundamentals? Ten-year government bond yields

4 Monetary Policy in the Region Common Regional Dimensions Monetary policy frameworks in the region different, but with many similarities on the backstage o o o o o o Given the size and openness of the economies, the exchange rate considerations always important, notwithstanding the monetary strategy implemented putting the balance of payments position and thus, the international environment into the monetary policy focus The high level of euroization, pertinent to most of the countries, important caveat of monetary policy and risk for financial stability The overwhelmed balance sheets of banks and private sector an additional constraint for larger and more effective post-crisis monetary policy accommodation Macroprudential policies actively used in the pre-crisis and post-crisis period Public finances in the post-crisis period under pressure to consolidate, additional pressure on monetary policy

5 Monetary Policy and other central banking measures in accommodative mode In general, monetary policies in the region still remain accommodative with downward adjustments in the policy rate, reserve requirements or credit supportive policies in place. Tightening of policy in Macedonia recently, as response to pressures on the deposit base and currency caused by temporary political factors, rather than economic fundamentals Country Reserve requirements Changes (beginning from 2008) Central bank interest rates, in % Albania Macedonia Serbia Slovenia Albania 10% Serbia Croatia 12% Montenegro Macedonia 5% - liabilities in dom. currency up to 2y 0% - liabilities in dom. currency over 2y 20% - liabilities in FX currency up to 2y 13% - liabilities in FX currency over 2y 100% - liabilities in FX currency FX currency-indexed liabilities in dinars 9,5% - on part of the base comprised of demand deposits and deposits with the agreed maturity up to 1y 8.5% on a part of the base comprised of deposits with the agreed maturity over one year. The RR base has been reduced for certain loans approved in In 2010, RR base in FX currency was extended by FXindexed dinar liabilities. In 2011, maturity differentiation of dinar and FX currency RR ratios. Increase of foreign currency RR, which is allocated in dinars. At end of 2014 and at beggining of 2015, CB lowered the RR in FX currency Further reductionof the RR in FX currency and an increase of the RR on the liabilities in FX currency FX currency-indexed liabilities in dinars. Cummulative decrease of RR ratio by 5 p.p. In 2011, termination of the RR remuneration In 2009, decrease of RR ratio by 1 p.p. In 2011, decrease of RR ratio by 0,5 p.p. Differentiation by currency from July 11, 2009 onwards. 8% - liabilities in domestic currency In 2009, increase of foreign currency RR ratio by 1,5 p.p. 50% - liabilities in domestic currency with In 2013, decrease of Denar RR ratio by 2 p.p. and increase FX clause of FX RR ratio by 2 p.p. 15% - liabilities in foreign currency In 2014, decrease of the remuneration amount In 2016, increase of the domestic currency with FX clause RR ratio by 30 p.p.

6 Benign external position and low inflation have created space for prolonged accommodative mode Narrowing CAD offsets the decelerated financial flows and leads to further build-up in foreign reserves Albania Current Account Balance (% of GDP) Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia International reserves (% of GDP) Albania Financing flows (% of GDP) Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia Albania Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia

7 Main monetary policy transmission channels Monetary stimulus aimed at lifting aggregate demand via five main channels: the credit channel by boosting credit to the real economy the asset valuation channel by lifting asset prices the portfolio balance and risk taking channels by reducing risk-off sentiment of investors the exchange rate channel by lowering the exchange rate the reflation channel by attempting to lift inflation up towards, and prevent debt deflation

8 Has the monetary policy transmission mechanism worked? Despite the historically low lending rates, anemic credit growth and relatively slow economic recovery Interest rates on total loans, in % Annual credit growth in % average average Albania Croatia Macedonia Montenegro Serbia Kosovo -2 Albania Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia Slovenia Kosovo

9 Unfavorable changes in the GDP composition Overall, share of investments in GDP has been declining or stagnating and remains low 15.0 Investment as a share of GDP 1 change * change ** Croatia Macedonia Albania Serbia Kosovo Montenegro BIH

10 Progress in pre-crisis productivity catch up has stalled significant gap remains with more advanced economies Labour Productivity in SEE countries (% of the labour productivity of Germany) Albania Bosnia & Herzegovina Croatia Macedonia Serbia & Montenegro Slovenia Average SEE countries 10

11 Are structural financial sector issues bottlenecks for more efficient transmission? The inference on healthy solvency and liquidity position of the banking system in the region remains valid, profitability is improving, but NPLs remain elevated Still, effects from deleveraging and tighter standards of parent banks/new Basel regulation Capital adequacy ratio, % Liquidity ratio, %

12 Are structural corporate sector issues bottlenecks for more efficient transmission? Private sector deleverage in the region after the crisis, not pronounced as in some of the euro area countries - Some studies pinpoint the need to deleverage, as misalignment with the fundamentals suspected to be present - Should we further ease the access to financing - or should we wait for stronger economic growth, orderly deleverage to take place and larger capacity of the private sector for taking additional debt burden? Private sector debt as % of GDP Serbia Croatia Macedonia Albania Slovenia Montenegro Bosnia and Herzegovina

13 Should we accommodate further? Relaxed policy transmitted into fall in the yields on deposits, as banks are safeguarding their profitability Funding issues might come to the fore, as external financing is scarce and more focus should be put on other domestic sources of financing, but, capital markets are underdeveloped..and further growth of domestic deposits under threat with the falling yields Interest rates on household deposits, in % Annual growth of household deposits, in % average average Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia Slovenia Kosovo Albania Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia Slovenia Kosovo

14 Should we accommodate further? As monetary policy makers, how much should we take into account the necessity for public finances consolidation, when deciding on further accommodation? Despite the improvements, public finances in the region are still under pressure to consolidate and stabilize the public debt level With uncertain growth prospects, it might be a challenging task General government gross debt (in % of GDP) Albania Croatia Macedonia Serbia BIH Kosovo Montenegro Slovenia Interest rates on government T-bills Albania Croatia Macedonia Montenegro Serbia Slovenia Kosovo Source: IMF, WEO Database, April 2016.

15 What are the risks from prolonged monetary accommodation down the road?* Main risks that may make the prolongation of ultra-low or negative nominal interest rates counterproductive. Disincentive Low rates actually encourage governments to borrow more - clear disincentive for fiscal discipline. Disruption Changes in business models of financial institutions challenging the retail banking and institutions with fixed long-term obligations -risk of financial intermediation Distraction Low interest rate can defocus the balance sheets repair. Monetary accommodation buys time, but is not a substitute for structural reforms Source: Remarks by Hervé Hannoun, Deputy General Manager, prepared together with Boris Hofmann. Bank for International Settlements, at the Eurofi High-Level Seminar, Riga, 22 April Disillusion Realization that new monetary orthodoxy is unlikely to result in higher global output will negatively impact confidence Distortion When CB becomes the main driver for prices ( not economic fundamentals), asset prices become distortedwhat happens when course of monetary policy is changed?

16 Macroprudential Policies important tool for containing the vulnerabilities Macrorprudential policies (MPP s) important for the region, in particular as in many of the countries monetary policy is either constrained, or absent, given the exchange rate policy in place Seen in a broader European context, four countries* from the region, considered as pioneers in the use of MPP s (IMF, WP/16/29) The region has used actively MPP s to tackle the imbalances during the period of economic and credit boom prior to the global crisis and reversed part of the tightening though MPP s in the bust period to prevent credit crunch Given the high euroisation level in all of the countries, there is a long tradition in using MPP s for tackling the issue the reserve requirement net-open foreign currency position of the banks, in particular *Croatia, Serbia, Romania, Bulgaria

17 To Recap Monetary policy in the region in the after-crisis period - accommodative and supportive to the growth agenda Structural factors (both on the demand and supply side) precluding more effective transmission to stronger credit and economic growth Thus, it is questionable whether further accommodation can help in reinvigorating the growth patter, despite the fact that regional interest rates are far from the lower bounds (if any) Further monetary accommodation might not be supportive to the need for more private and public sector deleveraging And may be conducive to vulnerabilities in the financial or external sector of the economy Bearing the risk of being repetitive: structural reforms must be in place for increasing the potential for growth and increasing the resilience to shocks, thus enabling a more effective monetary policy at the same time