Euros Third Decade The ECB beyond Draghis legacy Lorenzo Bini - - PowerPoint PPT Presentation

E C O N O M I C A N D S E C T O R S T U D I E S

Lorenzo Bini Smaghi

Monetary Policy in the Euro’s Third Decade

The ECB beyond Draghi’s legacy

L U I S S , 1 1 N O V E M B E R 2 0 1 9

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

Source : EC B, SG Economic and Sector Studies

Mario Draghi’s “whatever it takes” speech, foreshadowing OMTs announcement

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 ?

Source : ECB, Draghi (2014, Amsterdam), SG Economic and Sector Studies

Contingencies Policy answer Decisions Unwarrented tightening of the policy stance (money markets; global bond markets; FX markets) Conventional measures (policy rates; forward guidance) Impairment in the transmission of the policy stance (bank lending chanel) Credit easing measures (long-term refi operations; private QE)

• TLTRO I
• TLTRO II
• TLTRO III
• ABSPP
• CSPP

Worsening of the medium-term outlook for inflation (aggregate demand; inflation expectations) Quantitative easing measures (Asset Purchase Programme)

• APP including PSPP
• APP extensions
• Refi rate cuts
• Deposit rate cuts
• Full allotment extensions
• Suspension of SMP sterilisation

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

Source : ECB, SG Economic and Sector Studies

TLTRO I TLTRO II TLTRO III

AND SOME IMPACT ON CREDIT FLOWS

Source : ECB, SG Economic and Sector Studies

TLTRO I TLTRO II TLTRO III

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

Source : ECB, NCBs, calculations by SG Economic and Sector Studies

€bn, 3M-ma (June 2019) Country Minimum reserves Excess liquidity (EL) Cost of negative deposit rate Exempted EL % of total EL Cost of negative deposit rate Change 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 FI 3.1 89.5 0.4 18.5 20.7 0.4 0.0 Situation before ECB's September policy package (without tiering, deposit rate -0.4%) Situation after ECB's September policy package (with tiering = 6* minimum reserves, deposit rate - 0.5%)

COST BORNE MAINLY BY CORE BANKS

€bn, 3M-ma (June Rest 6.4 55.6 0.2 38.5 69.2 0.1 0.1 Total 128.8 1875.0 7.5 773.0 41.2 5.5 2.0

WHAT’S LEFT IN THE TOOL BOX?

Raising issuer limits Deviation from capital keys Tiering adjustme nts APP extension to bank bonds Yield curve targeting APP extension to ETFs FX interventi

• ns

Helicopter money

More of the same Foreign references Getting innovative

Going further negative

High political constraint Low political constraint

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…..

REVIEWING THE STRATEGY

• 2
• 1

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WILL FISCAL POLICY COME TO THE RESCUE? Fiscal Space