July 18 - 21 2013 Public debt and monetary policy Introductory - - PowerPoint PPT Presentation
Aspects of the euros future July 18 - 21 2013 Public debt and monetary policy Introductory statement by Francesco Papadia* 1 * With the assistance of Madalina Norocea I. REGAINING CONTROL OF INTEREST RATES IN THE -AREA II. THE RISKS OF
Aspects of the euro’s future July 18 - 21 2013
Public debt and monetary policy Introductory statement by Francesco Papadia*
* With the assistance of Madalina Norocea
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BANKS
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RATES IN THE €-AREA
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“Natural” interest rate Central bank interest rate Wicksellian Differential Taylor rule approaches ≈ Savings Investments Production Employment Interest rate channel
Transmission Mechanism- a Neo-Wicksellian approach 4
Non standard actions
50 100 150 200 250 300 350 400 450 500 Jan-07 Mar-07 Jun-07 Aug-07 Nov-07 Feb-08 Apr-08 Jul-08 Oct-08 Dec-08 Mar-09 Jun-09 Aug-09 Nov-09 Jan-10 Apr-10 Jul-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11 Oct-11 Jan-12 Apr-12 Jun-12 Sep-12 Dec-12 Feb-13 May-13 Index (Jan 2007=100)
Eurosystem Federal Reserve Bank of England Bank of Japan
Central bank balance sheets
Source: Central banks statements
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Repo based expansion in the €-area
500 1,000 1,500 2,000 2,500 3,000
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 Sep-12 Jan-13 May-13 EUR billion MLF+FTO USD repo Net foreign assets MRO Domestic assets LTRO Policy portfolios
Eurosystem Assets (lhs) and Liabilities (rhs)
Source: European Central Bank weekly statements
500 1,000 1,500 2,000 2,500 3,000 Jan-07 Apr-07 Aug-07 Nov-07 Feb-08 Jun-08 Sep-08 Jan-09 Apr-09 Aug-09 Nov-09 Mar-10 Jun-10 Sep-10 Jan-11 Apr-11 Aug-11 Nov-11 Mar-12 Jun-12 Oct-12 Jan-13 May-13 Current accounts Deposit facility Absorbing operations Other autonomous factors (net) Government deposits Banknotes in circulation
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Outright based expansion in the US
500 1,000 1,500 2,000 2,500 3,000 3,500 Jan-07 Apr-07 Aug-07 Dec-07 Mar-08 Jul-08 Nov-08 Feb-09 Jun-09 Oct-09 Jan-10 May-10 Sep-10 Dec-10 Apr-11 Aug-11 Nov-11 Mar-12 Jul-12 Oct-12 Feb-13 Jun-13 USD billion Central bank liquidity swaps Lending to specific institutions US Treasury securities Repo&Loans Net foreign assets MBS Federal agency debt securities Commercial paper funding facility Term auction credit Other assets 500 1,000 1,500 2,000 2,500 3,000 3,500 Jan-07 May-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Banknotes US Treasury general account Current accounts Term deposits Reverse repos Treasury supplementary account Other liabilities and capital
Federal Reserve balance Assets (lhs) and Liabilities (rhs)
Source: Federal Reserve H.4.1. release
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Risk of endogenous tightening in the €-area?
Surplus liquidity
Source: European Central Bank
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The magnetic power of Government bond yields
5 10 15 20 25 30 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 Sep-12 Jan-13 May-13
%
Greece Portugal Ireland Spain Italy France
Selected €-area government bond spreads against Germany (10 yr)
Source: European Central Bank
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200 400 600 800 1000 1200 Oct-09 Jan-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-13 May-13 Asset Swap Spread (bp)
Germany Ireland Italy Portugal Spain
MRO cut "Whatever it takes" MRO cut
Covered bond asset swap spreads in selected jurisdictions
Note: The data represents the iBoxx EUR covered bond benchmark indices in the selected jurisdictions. Source: Markit.
Regaining control of interest rates : lower MRO rates and OMT 10
MEASURES FOR CENTRAL BANKS
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Financial risk
Amount in € billion End 2012 End 2011 End 2010 End 2009 Capital and reserves 86 82 80 73 Provisions 51 35 30 24 Revaluation accounts 407 394 332 220 Total buffers (estimated) 544 511 442 317
Source: ECB and NCBs Annual Reports
Eurosystem “equity” buffers
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Short term inflation risk
1 2 3 1999 Q1 1999 Q3 2000 Q1 2000 Q3 2001 Q1 2001 Q3 2002 Q1 2002 Q3 2003 Q1 2003 Q3 2004 Q1 2004 Q3 2005 Q1 2005 Q3 2006 Q1 2006 Q3 2007 Q1 2007 Q3 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3
%
Two years ahead Forecasting Error 2 yr (*)
Inflation expectations (Professional forecasters)
Source: European Central Bank
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Short-term inflation risk
5 10 15 20 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 %
Max Euro area (changing composition) Min
Inflation developments within €-area countries
Source: European Central Bank
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... Government funding constraint
... “unexpected abilities should not feed illusions that central banks can do more than they actually can.”
... Inflation is not dead once and for all
Timing of the exit is critical
Other risks
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risk during a crisis;
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RESERVE SLIDES
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Money multiplier in Germany (1980-1999) and €-area (1999-2013)
%
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€-area monetary base (lhs) vs HICP index (rhs) (1999-2013)
EUR billion
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