Monetary Policy Operations

Monetary Policy Operations Denis Blenck DG Market Operations Generation uro Students Award Teachers session 24 September 2012

Outline MONETARY POLICY IMPLEMENTATION IN NORMAL TIMES MONETARY POLICY IMPLEMENTATION IN TIMES OF CRISIS 1. The crisis context and the ECB reply 2. The liquidity support provided by the ECB 3. The outright transactions on securities markets 4. Challenges 2

Outline MONETARY POLICY IMPLEMENTATION IN NORMAL TIMES MONETARY POLICY IMPLEMENTATION IN TIMES OF CRISIS 1. The crisis context and the ECB reply 2. The liquidity support provided by the ECB 3. The outright transactions on securities markets 4. Challenges 3

1. Consolidated weekly financial statement of the Eurosystem (29 June 2007) 4

2. Simplified balance sheet of the Eurosystem 29/06/2007, EUR billions Assets Liabilities Autonomous liquidity factors Autonomous liquidity factors Net foreign assets 317 Banknotes in circulation 633 Domestic assets 131 Government deposits 70 Other autonomous factors (net) 27 Monetary policy instruments Monetary policy instruments Main refinancing operation 313 Current accounts 182 Longer term refinancing operation 150 Absorbing operations 0 Marginal lending facility 1 Deposit facility 1 Total 913 Total 913 5

3. Outstanding open market operations 6

4. ECB official rates Changes in interest rates: depending on ECB s assessment of price stability risks % EONIA Deposit rate Marginal lending rate Min.bid rate 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 7

5. Steering short term rates Defining the right amount for the provision of liquidity in monetary policy operations Expectation for the last day: EONIA = mid point of corridor On any other day: EONIA = expectation for the last day 4.75 3.5 4.25 3.00 3 3.75 2.5 Evolution of interest rates during a Maintenance Period Maintenance Period Marginal lending rate overnight rate 3.25 2.00 2 Minimum bid rate 2.75 1.5 2.25 1.00 1 Deposit rate 1.75 0.5 Start of MP 1st MRO 2nd MRO 3rd MRO 4th MRO End of MP 8

6. The last normal maintenance period 11 July 7 August 2007 Daily reserve surplus/deficit (left-hand scale) Average daily reserve surplus (left-hand scale) EONIA (right-hand scale) 120.0 100.0 80.0 60.0 MRO with benchmark +1.0 bn MRO with benchmark +1.0 bn MRO with benchmark +1.0 bn regular LTRO of 50 bn MRO with benchmark +1.0 bn 5.00 4.75 4.50 EUR billions 40.0 20.0 0.0-20.0-40.0-60.0-80.0-100.0-120.0 4.25 4.00 % 3.75 3.50 3.25 3.00 11 Jul 07 12 Jul 07 13 Jul 07 14 Jul 07 15 Jul 07 16 Jul 07 17 Jul 07 18 Jul 07 19 Jul 07 20 Jul 07 21 Jul 07 22 Jul 07 23 Jul 07 24 Jul 07 25 Jul 07 26 Jul 07 27 Jul 07 28 Jul 07 29 Jul 07 30 Jul 07 31 Jul 07 01 Aug 07 02 Aug 07 03 Aug 07 04 Aug 07 05 Aug 07 06 Aug 07 07 Aug 07 9

Outline MONETARY POLICY IMPLEMENTATION IN NORMAL TIMES MONETARY POLICY IMPLEMENTATION IN TIMES OF CRISIS 1. The crisis context and the ECB reply 2. The liquidity support provided by the ECB 3. The outright transactions on securities markets 4. Challenges 10

1. The crisis context 11

1. The crisis context 12

1. The ECB reply - The ECB interest rates have been cut in on several occasions November 2011, December 2011, July 2012- each time by 25 b.p. Those decisions result from dampened inflation pressures, downside risks to euro area economic growth, heightened uncertainty weighing upon confidence and sentiment whereas inflation expectations are firmly anchored. - The ECB interest rates are at very low levels, - MRO rate at 0.75% and deposit facility rate at 0%. Some market rates are negative (some T-bills, repo rates ) and the implications of that situation must be analysed further. 13

1. The ECB reply Enhanced credit support: Non standard measures to ensure the good functioning of the money market and enhance the credit flow of banks above and beyond what could be achieved through interest rate reductions Full allotment of banks demands for central bank liquidity at fixed rates Refinancing operations with longer maturities Enhanced collateral availability Provision of liquidity in foreign currency (esp. US$) Outright purchases of securities in various programmes: covered bonds (I and II), SMP, OMT 14

2. The Eurosystem liquidity support Liquidity flows in normal times: through the money market Central bank Bonds 63 Banknotes 50 Current accounts 15 Refinancing operations 2 Deposit facility 0 65 65 Bank A Bank B Loans 17 Deposit base 10 Loans 12 Deposit base 17 central bank deposits 0 Central bank refinancing 2 Central bank deposits 0 Central bank refinancing 0 Interbank lending 0 Interbank borrowing 5 Interbank lending 5 Interbank borrowing 0 17 17 17 17 15

2. The Eurosystem liquidity support Liquidity flows in crisis times: through central bank (intermediation) Central bank Bonds 63 Banknotes 50 Current accounts 15 Refinancing operations 7 Deposit facility 5 70 70 Bank A Bank B Loans 17 Deposit base 10 Loans 12 Deposit base 17 central bank deposits 0 Central bank refinancing 7 Central bank deposits 5 Central bank refinancing 0 Interbank lending 0 Interbank borrowing 0 Interbank lending 0 Interbank borrowing 0 17 17 17 17 16

2. The Eurosystem liquidity support Maturity transformation: Banks borrow at long maturity (LTRO of up to 3 years), at MRO rate, against broad collateral; and re-deposit overnight (deposit facility): structural recourse to the deposit facility => short term rates at lower bound of standing facility corridor => term spreads decline => banks have access to long term funding at better conditions than in a well functioning market? % EONIA Deposit rate Marginal lending rate Min.bid rate 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 17

2. The Eurosystem liquidity support 18

2. The Eurosystem liquidity support The Single List of Collateral All credit operations to be based on adequate collateral (art. 18.1 of the Statute) Contains a broad range of securities and bank loans and was considerably expanded during the crisis Homogeneous level of risk across asset classes with haircuts No collateral differentiation between monetary policy instruments (and intra-day credit) 19

2. The Eurosystem liquidity support Eligible collateral Used collateral EUR Billion 16,000 14,000 EUR Billion 2,250 2,000 12,000 1,750 10,000 1,500 1,250 8,000 1,000 6,000 750 4,000 500 2,000 250-2004 2005 2006 2007 2008 2009 2010 2011 0 2004 2005 2006 2007 2008 2009 2010 2011 non-marketable assets asset-backed securities covered bank bonds regional government securities Outstanding credit other marketable assets corporate bonds uncovered bank bonds central government securities Peak outstanding credit 20

3. Outright transactions Covered Bond Purchase Programme CBPP1: purchases for an intended amount of EUR 60 bn in primary and secondary markets aiming to support the good functioning of covered bond markets and the granting of credit to the economy; purchases started in July 2009 and ended up in June 2010; Covered Bond Purchase Programme CBPP 2: intended amount is EUR 40 bn; started in November 2011 and are expected to be fully implemented by October 2012; outstanding amount: 16.2 bn. 21

3. Outright transactions Securities market programme (SMP): Interventions in the euro area private and (secondary) public debt securities markets Aim: market functioning and policy transmission Small scale purchases, less than 25% of banknotes in circulation (EUR 211 billion outstanding on 15 June 2012) The liquidity injection from SMP is sterilised: One week deposits Ensures no effect on monetary policy stance through SMP liquidity Quantitative easing is different from the SMP: Aim: achieve preset target for outstanding liquidity (base money) Large scale purchases, Bank of England: targets 600% of banknotes in circulation (GBP 325 billion) No sterilisation 22

3. Outright transactions Development of the size of the SMP: 23

3. Outright transactions Outright Monetary Transactions (OMT): Interventions in the secondary markets for sovereign bonds in the euro area decided by the Governing Council on 6 September 2012 Aim: preserve the singleness of the monetary policy in the euro area and ensure the proper transmission of the policy stance in the real economy by addressing severe distorsions in the bond markets due to the fears on the part of investors of the reversibility of the euro Ex-ante unlimited in size to achieve the objectives Operations decided by the Governing Council under strict conditions: justified from a monetary policy perspective, strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme which is fully respected by the beneficiary country The maturity of securities purchased between 1 and 3 years The liquidity injection from OMT will be sterilised Not comparable to quantitative easing. 24

4. Challenges Monetary policy transmission mechanism / calming down markets Firepower of Eurosystem / lender of last resort Integrity of euro area / redenomination risk Versus Moral hazard / free-rider problem / lack of banking union Avoiding losses (don t monetize bad assets / monetary financing prohibition) And eventually, the exit from the crisis set-up 25

Thanks for your attention 26