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 1 852 35 Bratislava Slovakia e-mail: hajnikov@dec.euba.sk telephone: +421 95 225 931 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
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 22. 4. 24 The structure of the ECB s capital Decision of Subscribed Paid-up capital from ECB from capital from 1. 1. 27 1. 1. 27 1. 1. 27 % % EUR EUR Banque Nationale de Belgique 2,552 2,478 142 334 199,56 142 334 199,56 Deutsche Bundesbank 21,1364 2,5211 1 182 149 24,19 1 182 149 24,19 Bank of Greece 1,8974 1,8168 14 659 532,85 14 659 532,85 Banco de Espaňa 7,7758 7,5498 434 917 735,9 434 917 735,9 Banque de France 14,8712 14,3875 828 813 864,42 828 813 864,42 Central Bank and Financial,9219,8885 51 183 396,6 51 183 396,6 Services Authority of Ireland Banca d Italia 13,516 12,5297 721 792 464,9 721 792 464,9 Banque centrale du,1568,1575 9 73 27,53 9 73 27,53 Luxembourg De Nederlandsche Bank 3,9955 3,8937 224 32 522,6 224 32 522,6 Oesterreichische Nationalbank 2,8 2,159 116 128 991,78 116 128 991,78 Banco de Portugal 1,7653 1,7137 98 72 3,22 98 72 3,22 Suomen Pankki 1,2887 1,2448 71 78 61,11 71 78 61,11 Banka Slovenije,3345,3194 18 399 523,77 18 399 523,77 EMU 71,498 69,592 4 4 183 399,81 4 4 183 399,81 Česká národní banka 1,4584 1,388 79 957 855,35 5 597 49,87 Sveriges Riksbank 2,4133 2,3313 134 298 89,46 9 4 866,26 Danmarks Nationalbank 1,5663 1,5138 87 24 756,7 6 14 332,92 Eesti Pank,1784,173 9 81 391,4 686 727,37 Central Bank of Cyprus,13,1249 7 195 54,85 53 653,84 Latvijas Banka,2978,2813 16 24 715,21 1 134 33,6 Lietuvos bankas,4425,4178 24 68 5,74 1 684 76,4 Magyar Nemzeti Bank 1,3884 1,3141 75 7 733,22 5 299 51,33 Bank Centrali ta Malta/Central,622 3 583 125,79 25 818,81 Bank of Malta,647 Narodowy Bank Polski 5,138 4,8748 28 82 283,32 19 657 419,83 Národná banka Slovenska,7147,6765 38 97 813,5 2 727 956,95 Bank of England 14,3822 13,9337 82 672 23,82 56 187 41,67 Banca Nationala a Romaniei - 2,5188 145 99 312,72 1 156 951,89 Bulharská národná banka -,8833 5 883 842,67 3 561 868,99 Non-member EMU 28,592 3,498 1 756 469 2,77 122 952 83,19 EU 1 1 5 76 652 42,58 4 127 136 23, Source: Autor s calculation based on the info from www.ecb.int 419
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 www.ecb.int 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
Chart 2 Main and longer term refinancing operations of Eurosystem 35 3 25 2 15 1 5 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 www.ecb.int 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
Chart 3 Growth rates of M1, M2 and M3 16 14 12 1 8 6 4 2 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 www.ecb.int 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
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 www.ecb.int info 423
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