Vítor Constâncio Vice-President of the ECB Assessing the new phase of unconventional monetary policy at the ECB European Economic Association 25 August 2015
Central banks balance sheets and the monetary base Central banks balance-sheets: size and composition Sources: ECB, Federal Reserve, Bank of England, Bank of Japan. Latest date: end July 2015. 2
Monetary base, broad money, credit and inflation Sources: ECB and Federal Reserve of St. Louis 3
Bank lending channel Unlocking impairments in transmission of policy rate cuts Cost of borrowing for NFCs new loans (composite indicator, percentages per annum) Rate reductions since the credit easing announcement (basis points, May 2014 June 2015) Sources: ECB. Notes: The indicator for the total cost of lending is calculated by aggregating short and long-term rates using a 24-month moving average of new business volumes. The crosscountry dispersion displays the min and max range over a fixed sample of 12 euro area countries after excluding the extreme values. Latest observation: June 2015. Vertical lines denote June 2014 and January 2015. 4 4
Bank lending channel Easing of credit standards and increases in demand Credit standards applied on loans to NFCs and factors contributing to the respective category (net percentage of banks contributing to tightening credit standards) Net demand of loans to NFCs and factors contributing to the respective category (net percentage of banks reporting a positive contribution to demand) Source: ECB (BLS). Notes: On the factors affecting credit standards: Cost of funds and balance sheet constraints as unweighted average of cost related to capital position, access to market financing and liquidity position ; Risk perception as unweighted average of general economic situation and outlook, industry or firm-specific situation and outlook/borrower s creditworthiness and "risk on collateral demanded"; Competition as bank competition, non-bank competition and competition from market financing. Risk tolerance introduced in 2015Q1. On the factors affecting demand: Other financing needs as unweighted average of M&A and corporate restructuring and debt refinancing/restructuring and renegotiation ; Use of alternative finance as unweighted average of internal financing, "loans from other banks", "loans from non-banks", issuance/redemption of debt securities and "issuance/redemption of equity". General level of interest rates introduced in 2015Q1. Vertical lines denote 2014Q2 and 2015Q1. Latest observation: April 2015 BLS. 5
Developments of stock prices and bond yields Euro Area stock prices (Index Aug 2014=100) Yields on euro area investment grade and highyield bonds (percentages per annum, Jan. 2012 Aug. 2015) Eurostoxx Eurostoxx Banks 180 Non-financial investment grade Non-financial high-yield 160 140 120 100 80 60 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 10 9 8 7 6 5 4 3 2 1 0 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Sources: Bloomberg investment grade and high-yield indices (1 10 year maturities) Notes: The line refers to 22 January 2015 which was the date when the extended APP was announced. 6
Inflation expectations Decline and recovery in inflation expectations Longer-term market based and survey-based measures of inflation expectations (percentages per annum) Five year inflation-linked swap rates five years ahead (percentages per annum) Source: Thomson Reuters and ECB. Note: The inflation-linked swap data extend up to 17 August 2015. Source: Thomson Reuters and ECB. Note: The inflation-linked swap data extend up to 17 August 2015. Vertical lines denote 4 June 2014 and 21 January 2015. 7
Recent inflation developments Euro area headline inflation and inflation excluding food and energy (annual growth rates) Sources: Eurostat. Latest observation: June 2015 (flash estimates). 8
Risks and potential costs of LSAPs Medium term inflation risks are very unlikely and central banks have enough instruments to deal with them. Exit strategy and the possibility of losses incurred by the central bank as Ben Bernanke said, this is a possibility but measured against the gains from a stronger economy and the previous budget contributions, that risk is not a true social economic risk (in D. Wessel (ed) Central Banking after the Great Recession: lessons learned, challenges ahead Brookings Institution, 2014.) Financial stability risks, stemming from search for yield and higher leverage these risks are real but monetary policy cannot be inhibited in respect for its priority goals. Those risks must be addressed by macroprudential policies of a regulatory and administrative nature. The corresponding toolkit given to central banks has to be enlarged. Potential laxity of credit risk management by financial institutions in a climate of low rates supervision, proper risk management governance and regulation of provisions, should deal with this problem Wealth effects and increased inequality a stronger economy and lower unemployment that result from the LSAPs mitigate but do not eliminate this possible side effect. 9
Assessment of equities and real estate valuations Stock prices broadly in line with fundamentals in the euro area, valuations somewhat stretched for US stock prices (Jan. 1983 - Aug. 2015, blue shaded area represents the 25-75 percentiles) Valuation estimates for euro area residential property and for prime commercial property (Q1 2001 Q2 2015 (for prime commercial property average of price changes in Austria, France, Germany, the Netherlands, Ireland and Spain) 60 euro area CAPE, 25-75 percentile US CAPE 50 40 30 20 10 0 1983 1985 1988 1990 1993 1995 1998 2001 2003 2006 2008 2011 2014 Sources: Datastream, Robert Shiller's homepage (http://www.econ.yale.edu/~shiller/data.htm) and ECB calculations. Notes: The cyclically adjusted price/earnings ratios for the euro area are imputed from Datastream's stock market indices. The US CAPE is taken from Robert Shiller's homepage.. 10 Sources: Jones Lang Lasalle, ECB and ECB calculations. Note: Valuation estimates for residential property prices are based on four different valuation methods: price-to-rent ratio, price-to-income ratio and two model-based methods. Last observation for Residential property is Q1 2015..
Assessment of corporate bond valuations Corporate bond Spreads (Daily data Jan 2014 to August 2015, in basis points) Euro area Financial and Non-Financial Corporations' Excess Bond Premium (Jan 2003 June 2014; in basis points) 150 EA DE ES FR IT 150 3 EBP (model 1) EBP (model 2) Financial corporations (model 1) 120 120 2 90 90 1 0 60 60-1 30 30 Jan.14 Apr.14 Jul.14 Oct.14 Jan.15 Apr.15 Jul.15 Sources: Iboxx and ECB calculations. Note: Corporate spreads, measured by asset swap spreads, are a weighted average of individual bonds with weights provided by outstanding amounts. Data include both investment grade and high yield bonds for both financials and nonfinancials... -2 1999 2001 2003 2005 2007 2009 2011 2013 Sources: Bloomberg, Merrill Lynch and ECB calculations. Note: Model 1: The excess bond premium is the deviation of the corporate credit spreads relative to the measured default risk of the issuer. It is obtained estimating the asset swap spreads of the individual bonds on individual coupon and maturity and credit ratings and on sectoral expected default frequency, using panel fixed effect methodology. The reported aggregate measures are compiled as the mean of the individual deviations. Darracq-Paries and De Santis (JIMF, 2015). Model2: The excess bond premium is the deviation of the corporate credit spreads relative to the measured default risk of the issuer. It is obtained estimating the spread between corporate yields and OIS rate of the individual bonds on coupon, maturity and rating. EBP is obtained by aggregating residual corporate bond spread made using bonds' outstanding 11 amounts. Altavilla, Darracq-Paries and Nicoletti (ECB mimeo, 2015). 11.
Recent macroprudential policy measures taken by EA countries Measures Countries Expected Impact Interest rate sensitivity test DE, IE, LT, SK Increase resilience of mortgage lending Interest rate caps / buffers on insurance contracts BE, DE Increase bank/ insurance profitability Increase insurance resilience Limits of pay-outs to shareholders BE Increase own funds of banks Clarifications to indexed lending rates PT Improves monetary policy pass-through Changes in bond fair value in AFS portfolios (468 CRR) LTV, DSTI SK CY, EE, IE, LT, LV, NL, SK Reduce dividend pay-outs Increase own funds of banks Reduce house price imbalances Increase resilience of borrowers and lending banks Contain mortgage lending/credit Caps on lending maturity SK, LT Limit maturity transformation Risk weights on mortgage lending BE Increase resilience of lending banks Contain mortgage lending /credit 12