Challenges to the single monetary policy and the ECB s response Benoît Cœuré Member of the Executive Board European Central Bank Institut d études politiques, Paris 2 September 212 1
Prime conduit of monetary policy in normal times: the interest rate channel 2
Crisis has led to elevated premia and liquidity hoarding by banks 45 in bp 9 Aug 7 Full allotment First 3Y LTRO bn.eur 9 35 Lehman First 1Y LTRO 8 7 25 15 5 Recourse to deposit facility 3-month Euribor over OIS 6 5 7 8 9 21 211 212 213 Sources: Bloomberg and ECB. Note: Weekly observations. Last observation: 7 September 212. 3
Monetary policy transmission channels Transmission plumbing Policy-controlled interest rates Liquidity channel Interest rate channel Inflationary expectations Credit supply, bank interest rates Long-term interest rates, asset prices Exchange rates Wage and price setting Supply and demand in goods and labour markets Import prices Price developments 4
Average maturity of OMO Average weighted OMO maturity in months 35 3 25 2 15 1 5 1Y LTRO Jun 9 3Y LTRO Dec 211 9 21 211 212 3Y LTRO Feb 212 Source: ECB calculations. Note: OMO stands for Outstanding Monetary Operations. Last observation: 18 September 212. 5
Evolution of euro area financial structure Source: ECB calculations. Note: Last observation: June 212. 6
New phase of the crisis started in May 21: concerns about creditworthiness of sovereigns 2, 1,8 1,6 1, 1, 1, 8 6 Sovereign bond spreads Austria Belgium Spain Finland France Ireland Italy The Netherlands Portugal Greece (RHS) Money market tensions Aug 7 Lehman bankruptcy Sep 8 GR revised budget deficit GR Programme (IMF/EC/ECB) and SMP I. May 21 IE Programme PT (EFSF) Programme Nov 21 (EFSF) May 211 SMP 2 Aug 211 GR PSI Mar 212 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 - - 7 8 9 21 211 212 213 Sources: Thomson-Reuters and ECB calculations. Note: Bond yield spreads are calculated vis-à-vis the German 1-year government bond, end-of-day data. Last observation: 18 September 212, 17: CET. 7
Fragmentation across national borders: selfreinforcing loop between bank and sovereign risks Ireland 15 Portugal 7 Spain 125 6 Bank CDS 15 5 7 1Q1 1Q2 1Q3 1Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 5 15 Sovereign CDS Bank CDS 75 1Q1 1Q2 5 1Q3 1Q4 11Q1 11Q2 25 11Q3 11Q4 12Q1 12Q2 12Q3 25 5 75 125 15 Sovereign CDS 5 1Q1 1Q2 1Q3 1Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 5 6 7 Sovereign CDS Italy Germany United States Bank CDS 6 35 35 5 Bank CDS 1Q1 1Q2 1Q3 1Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 5 6 7 Sovereign CDS Source: ECB calculations. Note: Last observation: 12 September 212. Bank CDS 25 15 5 1Q1 1Q2 1Q3 1Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 5 15 25 35 Sovereign CDS Bank CDS 25 15 5 1Q1 1Q2 1Q3 1Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 5 15 25 35 Sovereign CDS 8
Cumulated changes in MRO rate and bank lending rates for short-term MFI loans to NFCs Changes in the composite bank lending rates between September 211 and July 212 (percentage points) 2th and 8th percentile range of lending rate changes MRO rate 1..75.5.25. -.25 -.5 -.75-1. Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Source: ECB calculations. Note: Over the same period the rate on the main refinancing operations (MROs) was cut by 75 basis points. The last available data for bank lending rates is July 212. 9
Outright Monetary Transactions (OMTs) Aim: to preserve singleness of monetary policy by addressing distortions in sovereign bond markets originating in particular from reversibility fears Necessary condition: strict and effective conditionality attached to appropriate EFSF/ESM programme Built-in exit strategy Focus on shorter part of yield curve No ex ante quantitative limits on size Pari passu treatment Full sterilisation 1
No clear signs of deflation fears or inflation fears Price of floor and caps (year-on-year) on euro area HICP inflation 5Y maturity Source: Bloomberg. Note: The market for inflation-linked options is relatively illiquid and often heavily influenced by specific demand and supply patterns. Developments should therefore be interpreted with caution. The underlying instruments are for inflation protection: year-on-year cap of 4% with 5-year maturity; for deflation protection: year-on-year floor of % with 5-year maturity. 11
Background slides 12
Evolution of liquidity term structure during the crisis EUR bn 16 1 1 8 6 - - -6-8 - Beginning of the financial turbulence Intensification of the financial turbulence Initiation of gradual phasing out 9 Aug 7 15 Sep 8 3 Dec 9 7 May 21 Start of the sovereign debt crisis 22 Dec 211 First 3-yr LTROs 16 1 1 8 6 - - -6-8 - -1 Jan 7 Apr 7 Jul 7 Oct 7 Jan 8 Apr 8 Jul 8 Oct 8 Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct 1 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12-1 main refinancing operation 1-maintenance period refinancing operation 6-month longer-term refinancing operation 3-year longer-term refinancing operation fine-tuning providing operation deposit facility Source: ECB Note: Last observation: 5 September 212. marginal lending facility 3-month longer-term refinancing operation 1-year longer-term refinancing operation covered bond purchase programme and securities markets programme fine-tuning absorbing operation liquidity needs 13
Evolution of money market spreads in euro area, US and UK (3-month maturity) 3-month Libor/Euribor to OIS spread 9 Aug 7 Full allotment First 3Y LTRO 35 Lehman First 1Y LTRO euro area 35 GBP 25 USD 25 15 15 5 5 7 8 9 21 211 212 213 Sources: Bloomberg and ECB calculations. Note: Last observation: 7 September 212. 14