E C O N O M I C A N D S E C T O R S T U D I E S L U I S S , 1 1 N O V E M B E R 2 0 1 9 Monetary Policy in the Euro’s Third Decade The ECB beyond Draghi’s legacy Lorenzo Bini Smaghi
TABLE OF CONTENTS 1. Draghi’s legacy: whatever it takes A. To save the euro B.To achieve price stability (?) 2. Post-Draghi era: pervasive challenges
TABLE OF CONTENTS Whatever it takes
THE EURO BREAKUP WAS AVOIDED
THE REDENOMINATION RISK HAS BEEN REDUCED Mario Draghi’s “whatever it takes” speech, foreshadowing OMTs announcement Source : EC B, SG Economic and Sector Studies
PRICE STABILITY HAS NOT BEEN ACHIEVED Source : ECB, SG Economic and Sector Studies
PRICE STABILITY HAS NOT BEEN ACHIEVED – FEDERAL RESERVE Source : Fed, SG Economic and Sector Studies
THE EURO AREA DID NOT FULLY RECOVER FROM THE SECOND CRISIS
INFLATION EXPECTATIONS HAVE NOT BE RE-ANCHORED Source : ECB, SG Economic and Sector Studies
THE ECB TOOLKIT WAS TOO SLOW TO ADJUST ? Contingencies Policy answer Decisions - Refi rate cuts Unwarrented tightening of the policy stance Conventional measures - Deposit rate cuts (money markets; global bond markets; FX markets) (policy rates; forward guidance) - Full allotment extensions - Suspension of SMP sterilisation - TLTRO I - TLTRO II Impairment in the transmission of the policy stance Credit easing measures - TLTRO III (bank lending chanel) (long-term refi operations; private QE) - ABSPP - CSPP - APP including PSPP Worsening of the medium-term outlook for inflation Quantitative easing measures - APP extensions (aggregate demand; inflation expectations) (Asset Purchase Programme) Source : ECB, Draghi (2014, Amsterdam), SG Economic and Sector Studies
INTEREST RATE POLICY WAS QUICK TO ADJUST, EVEN INTO NEGATIVE Source : ECB, SG Economic and Sector Studies
NEW REFINANCING OPERATIONS WERE INTRODUCED Source : ECB, SG Economic and Sector Studies
WITH SOME IMPACT ON LENDING RATES TLTRO I TLTRO II TLTRO III Source : ECB, SG Economic and Sector Studies
AND SOME IMPACT ON CREDIT FLOWS TLTRO I TLTRO II TLTRO III Source : ECB, SG Economic and Sector Studies
BUT THE HORSE WAS NOT DRINKING
QUANTITATIVE EASING STARTED TOO LATE ?
TABLE OF CONTENTS The Challenges ahead
THE CHALLENGES AHEAD: (SELF IMPOSED) LEGAL CONSTRAINTS Source : ECB, SG Economic and Sector Studies
SIDE EFFECTS OF NEGATIVE RATES Source : ECB, SG Economic and Sector Studies
COST BORNE MAINLY BY CORE BANKS €bn, 3M-ma (June Situation after ECB's September policy package €bn, 3M-ma (June Situation before ECB's September policy package (with tiering = 6* minimum reserves, deposit rate - 2019) (without tiering, deposit rate -0.4%) 0.5%) Minimum Excess liquidity Cost of negative Exempted % of Cost of negative Country Change reserves (EL) deposit rate EL total EL deposit rate DE 36.9 645.7 2.6 221.3 34.3 2.1 0.5 FR 25.7 456.9 1.8 154.2 33.7 1.5 0.3 IT 15.6 77.0 0.3 93.5 121.4 0.0 0.3 ES 13.2 94.6 0.4 79.1 83.7 0.1 0.3 NL 9.4 168.5 0.7 56.5 33.5 0.6 0.1 BE 4.5 86.4 0.3 26.7 30.9 0.3 0.0 AT 3.9 39.4 0.2 23.6 59.8 0.1 0.1 Rest 6.4 55.6 0.2 38.5 69.2 0.1 0.1 FI 3.1 89.5 0.4 18.5 20.7 0.4 0.0 Total 128.8 1875.0 7.5 773.0 41.2 5.5 2.0 Source : ECB, NCBs, calculations by SG Economic and Sector Studies
WHAT’S LEFT IN THE TOOL BOX? Getting innovative High political constraint Foreign references Helicopter money More of the FX same interventi ons APP Deviation extension from to bank capital APP bonds keys extension Raising to ETFs issuer limits Yield curve targeting Going Tiering further adjustme negative nts Low political constraint
REVIEWING THE STRATEGY 1. THE INFLATION TARGET - SYMMETRY (RATHER RATHER THAN CLOSE BUT BELOW 2%) - RANGE (1-3%) - LONGER HORIZON TO ACHIEVE PRICE STABILITY - PRICE LEVEL TARGETTING …. 2. BROADEN THE MANDATE - FINANCIAL STABILITY - GREEN NEW DEAL…..
WILL FISCAL POLICY COME TO THE RESCUE? -2 -1 0 1 2 3 4 5 US France Italy Spain Finland Luxembourg Fiscal Space Belgium Austria Slovakia Portugal Germany Netherlands Ireland Slovenia
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