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The First 20 Years of the European Central Bank: Monetary Policy
ECB Central Banking Seminar
Philipp Hartmann and Frank Smets European Central Bank
Frankfurt am Main 1 July 2019
Disclaimer: Any views expressed are only the authors’ own and should not be regarded as views of the ECB or the Eurosystem
(ECB Working Paper no. 2,219)
Rubric
www.ecb.europa.eu © 2
Sources: Authors and ECB.
Four cyclical phases, inflation and growth record
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
-1
0
1
2
3
4
5
1999 2002 2005 2008 2011 2014 2017
HICP inflation [L] HICPX core inflation [L]
5-years ahead inflation expectations [L] HICP average since 1999 [L]
HICP 5-years moving average [L] Real GDP growth [R]
End of technology cycle
Economic upturn and build-up of imbalances
Financial and sovereign debt crises
Low-inflation recovery% %
ECB delivered price stability, with major effort to fight disinflationary pressures after sovereign crisis
• Average headline inflation 1.7%
• Fluctuations between 4.1 and -0.7%
• Longer-term expectations anchored (between 1.8 and 2%)
• Protracted low-inflation period after sovereign-debt crisis
• HICP reading end of sample: 2% (Aug 2018)
• Core inflation still more muted
Third cycle charts Inflation expectations
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Jan1999-Jun2003: The technology bubble and the ECB’s first interest rate cycle • A new stability-oriented
monetary policy strategy (robustness) – Definition of price stability (medium
term; symmetry?) – Two-pillar framework (with
prominent role for money) – Communication and accountability
(press conference, projections in 2000; minutes?)
• A broad operational framework – Weekly main refinancing operations
(overbidding episodes) – Corridor system through standing
facilities – Broad set of collateral – Large number of counterparties
3
• Early policy rate surprises but good predictability soon
• First test of anti-inflation credibil-ity as euro depreciates and infla-tion peaks above 3% (+225bp)
• Concerted FX interventions in Sep 2000
• Breakdown of dot-com bubble triggers discussion on lower bound of interest rates (-275bp to MROR=2% in Jun 2003)
• Decoupling of money and credit growth (flight to safety) under-mines M3 reference value
First cycle charts Decoupling chart
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Jul2003-Jul2007: Economic upturn and growing imbalances without “leaning against the wind”
4
• 2003 review of the strategy – “below, but close to, 2 percent”
(clarification) – Annual review of reference value
stopped – Monetary analysis as a “cross
check” goes second in introductory statement (medium-to-long term)
• Applauded, but debate about monetary analysis continues – 2006 ECB symposium on the role
of money – Research program broadening it
• And so does asymmetry discussion
• Stable rates for 2.5 years
• Discussion about money, asset prices and financial stability
• 200bp rate increases starting in Dec 2005 (monetary analysis) – Rate policy not too lose according
to interest rate rule – No evidence of “leaning against the
wind”
• Growing imbalances between euro area countries – Diverging intra-euro area current
account balances – Accompanied by diverging
competitiveness, credit and house price developments
– Some countries private or public debt overhangs
Second cycle charts FX/Oil chart Rate rule Imbalances real Imbalances financial
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Aug2007-Jun2013: The financial crisis, the double-dip recession and non-standard monetary policy • Operational framework takes
centre stage with “separation principle”
• Well suited for LLR addressing bank funding problems
• Did separation principle contribute to premature tightening in 2008 or 2011?
• Conventional loosening: -400bp in 7 months
• FRFA: DFR=25bp in Apr 2009 • Sovereign debt crisis and
double-dip recession special to EA 5
• SMP: limited; temporary; no credible conditionality
• Could ECB have reacted more decisively to sovereign crisis? – Lingering fiscal and banking problems
major obstacles for monetary policy – Severe propagation mechanisms
(sovereign-bank nexus, re-denomination risk)
– Collective action problems in incomplete EMU
– Balance transmission repair with “prohibition of monetary financing”
• Turning point: around June 2012 Council (ESM, Banking Union…)
• New context: OMT etc. possible
Third cycle charts Credit standards 2008 hike 2011 1st hike 2011 2nd hike Inflation slide
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Above the zero bound a standard policy rule explains most ECB interest rate moves well
6
Notes: Short rate is the interest rate in main refinancing operations (MROs) until 2008Q3 and the deposit facility rate (DFR) from 2008Q4 onwards. Sources: Authors, ECB, ECB staff projections and European Commission.
Orphanides rule for the euro area with inflation and output taken from ECB/Eurosystem projections
• Estimated goal: 1.8% • Headline, not core • No asymmetry in policy • No additional info from
money or credit (“cross-checking”)
• Largest cumulative errors – A bit loose in 2002 – Somewhat tight in 2009 and
2013 – But then non-standard!
• Good fit vanishes when DFR hits 0 in Jul 2012
∆𝑖𝑖 = 0.5 𝐸𝐸𝜋𝜋𝑡𝑡+1 − 𝜋𝜋� + 0.5(𝐸𝐸∆𝑦𝑦𝑡𝑡+1 − ∆𝑦𝑦�)
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
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Jul2013-Jun2018: Addressing the lower bound of interest rates and the low-inflation recovery • Moderate recovery but damage
of sovereign debt crisis: Very low inflation, de-anchoring risks and even deflation risks, with DFR having reached 0 in Jul 2012
• “Three-pronged” approach to dispel doubts that ECB has tools to fight them close to the lower bound (as of Jun 2014) 1) Negative rates (first major CB) up
to -40bp 2) Targeted LTROs 3) Expanded asset purchase
programme (“Quantitative Easing”)
7
• Communication changes in complex non-standard context – Explicit forward guidance (Jul 2013) – Publication of the account
• Debate on rationale, sequencing, costs and benefits of non-standard measures – Evidence on effectiveness – Negative rates and bank
profitability – Low for long, risk taking and
financial stability – APP and distributional effects – Low interest rates and fiscal
incentives
• ECB now more similar to other major central banks
Fourth cycle charts FX/Oil chart
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Framework for non-standard monetary policy since the crisis: different purposes and effectiveness
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
8 Sources: Authors and ECB.
Timeline
Financial crisis Sovereign debt crisis Low-inflation recovery (with lower bound constraint)
Interest rate policy +25bps
MRO:4.25%
-400bps
DFR:0.25%
+50bps
DFR:0.75%
-75bps
DFR:0%
-20bps DFR:-0.20%
-20bps
DFR:-0.40%
Credit operations
Overnight FTOs “Front-loading” Maturity extension Dec07 $ swaps
Oct08 FRFA Expand. collateral LTROs (6m) $ swaps May09 LTROs (1y)
Oct11 LTROs Dec11 VLTRO I (3y) Feb12 VLTRO II (3y)
Jun14 TLTRO I
Mar16 TLTRO II
Asset purchases
May09 CBPP I
May10 SMP I
Aug11 SMP II Oct11 CBPP II
Sep12 OMT
Jun14 ABSPP CBPP III
Jan15 PSPP
Dec15 APP I
Mar 16 CSPP APP II (80bn)
Dec16 APP III (60bn) Oct17 APP IV (30bn)
Jun18 APP V (15bn)
Forward guidance
Jul13 FG I: Policy rate extended period
Jan15 FG II: APP
date and SAPI
Mar16 FG III:
Policy rate well past
APP
Jun18 FG IV: Exp. APP end date and SAPI
06/2013 08/2007 05/2010 08/2011 Standard interest rate policies Negative Deposit Facility Rate Non-standard policies to address lower bound of rates
09/2008 08/2015 12/2016
Impaired interbank and bank funding markets and later also bank lending channel Sovereign-bank nexus and re-denomination risk Heterogeneous pass-trough in bank lending markets
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Concluding remarks 1 • Overall, ECB delivered on its price stability mandate • Could it have responded more proactively to the sovereign debt crisis? • Its monetary policy strategy and framework served it well, also because it
was adapted to new challenges when needed – Initial policy strategy with a prominent role for money helped dispel early questions about
the ECB’s anti-inflationary resolve – When interest rates became low for the first time the inflation aim was clarified – The economic analysis and quarterly projections gained prominence when monetary
aggregates were harder to interpret in the short-to-medium term (“cross-checking”) – The breadth of the ECB’s market operational framework allowed it to react quickly in the
early phases of the financial crisis – After the sovereign debt crisis, when the effective lower bound became increasingly a
constraint, the ECB significantly expanded its non-standard tools (to quantitative easing, funding for lending, negative rates and forward guidance policies), proving its anti-deflationary resolve
– The extension of the monetary analysis to a broad perspective on financial intermediation and bank lending allowed assessing impairments in monetary transmission during the crises and the effectiveness of some non-standard measures
• ECB broadened its overall toolkit, resembling now closer to its peers
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
9
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Concluding remarks 2 • Some aspects of the ECB policy framework inspired other central banks
– Medium-term orientation of the price stability aim – Monetary policy press conference – Broad and flexible operational framework
• But the incompleteness of EMU and imperfections in fiscal and prudential policies could continue to cause significant “headwinds” to monetary policy
• Some issues have been addressed in a series of important reforms – European Stability Mechanism – European Banking Union (Single Supervisory and Resolution Mechanisms) – European Semester and Macroeconomic Imbalance Procedure
• ECB monetary policy benefits tremendously from a thorough implementation of these reforms and from compliance with their objectives and rules
• It would also benefit enormously from further progress with completing EMU
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
10
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
Annex
11
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Jan1999-Jun2003: The technology bubble and the ECB’s first interest rate cycle
12
Back
Sources: Authors and ECB.
8.0
9.0
10.0
11.0
0.0
1.0
2.0
3.0
4.0
5.0
01/1999 01/2000 01/2001 01/2002 01/2003
HICP inflation [L] ECB policy rate (MROR/DFR) [L]
Real GDP growth [L] Unemployment rate [L]% %
Dot.c
om p
eak
EA st
ocks
US
terr
orist
att
acks
Eval
uatio
n m
onet
ary
polic
y st
rate
gy
follo
wed
by
coor
dina
ted
rate
cut
15
20
25
30
35
40
0.8
0.9
1.0
1.1
1.2
01/1999 01/2000 01/2001 01/2002 01/2003
USD/EUR [L] Oil (Brent spot) [R] USD% USDUSD
Conc
erte
d EC
B, F
ed, B
oJ F
X in
terv
entio
ns
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Jan1999-Jun2003: The technology bubble and the ECB’s first interest rate cycle
13
Back
Sources: Authors and ECB.
3
5
7
9
11
13
3
5
7
9
11
13
01/1999 01/2000 01/2001 01/2002 01/2003
Credit growth to private sector [L] M3 growth [R]
ECB reference value for M3 growth% %
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Jul2003-Jul2007: Economic upturn and growing imbalances without “leaning against the wind”
14
Back
Sources: Authors and ECB.
7.0
8.0
9.0
10.0
0.0
1.0
2.0
3.0
4.0
07/2003 07/2004 07/2005 07/2006 07/2007
HICP inflation [L] ECB policy rate (MROR) [L]
Real GDP growth [L] Unemployment rate [R]
% %
4.0
6.0
8.0
10.0
12.0
4.0
6.0
8.0
10.0
12.0
07/2003 07/2004 07/2005 07/2006 07/2007
Credit growth to private sector [L] M3 growth [R]% %
Com
mitt
ee o
f Eur
opea
n Ba
nkin
g Su
perv
isors
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Jul2003-Jul2007: Economic upturn and growing imbalances without “leaning against the wind”
15
Back
Sources: Authors and ECB.
20
30
40
50
60
70
80
1.1
1.2
1.3
1.4
07/2003 07/2004 07/2005 07/2006 07/2007
USD/EUR [L] Oil (Brent spot) [R] USD%
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Aug2007-Jun2013: The financial crisis, the double-dip recession and non-standard monetary policy
16
Back
Sources: Authors and ECB.
0.2
0.6
1.0
1.4
-6
-2
2
6
07/2007 07/2008 07/2009 07/2010 07/2011 07/2012 07/2013
HICP inflation [L] ECB policy rate (MROR/DFR) [L]
Real GDP growth [L] ECB monetary policy operations [R]
%% € trn%
Larg
e liq
uidi
ty o
pera
tions
Fixe
d-ra
te fu
ll al
lotm
ent
tend
ers
Secu
ritie
s M
arke
ts P
rogr
am
Firs
t VLT
RO
Firs
t for
war
d gu
idan
ce
Out
right
Mon
etar
y Tr
ansa
ctio
ns
Drag
hi “
wha
teve
r it t
akes
”
Market turmoil Systemic financial crisis Sovereign debt crisis
-4
0
4
8
12
16
0
50
100
150
200
250
300
07/2007 07/2008 07/2009 07/2010 07/2011 07/2012 07/2013
EA 10y gov spread to DE bunds [L] Spread 3m Euribor to EUR OIS [L]
Credit growth to private sector [R] M3 growth [R]bp %
Coun
cil a
gree
men
t Eur
opea
n Ba
nkin
g U
nion Eu
rope
an S
tabi
lity
Mec
hani
sm
Lehm
an fa
ilure
Dexi
a re
solu
tion
Gree
ce re
ques
ts fi
nanc
ial a
ssist
ance
Firs
t EBA
stre
ss te
st
Euro
pean
Fin
anci
al S
tabi
lity
Faci
lity
US
tape
r tan
trum
Market turmoil Systemic financial crisis Sovereign debt crisis
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Aug2007-Jun2013: The financial crisis, the double-dip recession and non-standard monetary policy
17
Back
Sources: Authors and ECB.
30
50
70
90
110
130
-10
10
30
50
70
06/2007 06/2008 06/2009 06/2010 06/2011 06/2012 06/2013
NFC credit standards [L] HH credit standards for houses [L]Oil (Brent spot) [R]
USD%
Market turmoil Systemic financial crisis Sovereign debt crisis
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Back
Jul2013-Jun2018: Addressing the lower bound of interest rates and the low-inflation recovery
Sources: Authors and ECB.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-1
0
1
2
3
07/2013 07/2014 07/2015 07/2016 07/2017 07/2018
HICP inflation [L] ECB policy rate (DFR) [L]
Real GDP growth [L] ECB monetary policy operations [R]% €trn
Expa
nded
Ass
et P
urch
ase
Prog
ram
Expa
nsio
n AP
P to
EU
R 80
bn p
er m
onth
Firs
t TLT
RO, A
BSPP
and
CBP
P3
Anno
unce
men
t exp
ecte
d en
d of
APP
7
8
9
10
11
12
13
-3
-2
-1
0
1
2
3
07/2013 07/2014 07/2015 07/2016 07/2017 07/2018
NFC bank lending rates [L] HH bank lending rates [L]
Credit growth to private sector [L] Unemployment rate [R]% %
Junc
ker P
lan
Sing
le R
esol
utio
n M
echa
nism
UK
Brex
it re
fere
ndum
ECB
com
preh
ensiv
e as
sess
men
t/ S
SM
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Jul2013-Jun2018: Addressing the lower bound of interest rates and the low-inflation recovery
Back
Sources: Authors and ECB.
30
40
50
60
70
80
90
100
110
120
1.1
1.2
1.3
1.4
07/2013 07/2014 07/2015 07/2016 07/2017 07/2018
USD/EUR [L] Oil (Brent spot) [R] USD%
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Introduction • European Economic and Monetary Union (EMU) is an unprecedented
historical project • Single currency and central bank for 19 (quite diverse) countries (without a
fiscal or political union) • Euro area: 340 million people producing 11% of world GDP • ECB started with a strong and self-contained monetary policy mandate to
pursue price stability as primary objective • Only indirect or contributing role in prudential or financial stability matters,
but SSM as of November 2014 • Motivation for the paper: ECB turned 20 this year • We review the monetary policy experience since the start, with some
emphasis on how the challenges of the European twin crises and subsequent slow recovery were met
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
20
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
21 Sources: Authors and ECB.
Speeches by ECB Executive Board members on monetary policy and inflation and their decomposition in topics (number of speeches per annum)
20 years of ECB monetary policy through the lens of Board Members’ public speech topics
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
22 Sources: Authors and ECB.
Figure 1: Speeches by ECB Executive and Supervisory Board members and their decomposition in general themes (number of speeches per annum)
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
23 Sources: Authors and ECB.
Figure 2: Speeches by ECB Executive Board members on monetary policy and inflation and their decomposition in topics (number of speeches per annum)
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
24 Sources: European Commission spring 2018 forecast; IMF World Economic Outlook April 2018; OECD Economic Outlook May 2018; ECB.
Figure 3: Euro area output gap estimates and the unemployment rate (LHS: percentage points, RHS: percent of labour force)
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
25
Figure 3a:
7
8.5
10
11.5
13
-5
-2.5
0
2.5
5
Unobserved Components Model Uncertainty Band (ECB) European Commission
Unobserved Components Model (ECB) OECD
IMF Unemployment rate (RHS)
Economic upturn and build-up of imbalances
Financial and sovereign debt crises
Economic upturn and build-up of imbalances
Financial and sovereign debt crises
Low-inflation recovery
End of technology cycle
Chronological overview in four sub-periods
Sources: European Commission spring 2018 forecast; IMF World Economic Outlook April 2018; OECD Economic Outlook May 2018; ECB.
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
26 Sources: Authors and ECB.
Figure 4: Four cyclical phases during the first twenty years of the euro – key macroeconomic and monetary policy variables and major events
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
27 Sources: ECB
Figure 5: ECB policy interest rates and EONIA (percentages per annum)
-1
0
1
2
3
4
5
6
-1
0
1
2
3
4
5
6
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Interest rate on the marginal lending facilityInterest rate on the main refinancing operationsOvernight interest rate (EONIA)Interest rate on the deposit facility
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Figure 6: Euro area headline inflation, core inflation and longer-term inflation expectations (SPF; year on year percentage change)
-1
0
1
2
3
4
5
-1
0
1
2
3
4
5
1999 2002 2005 2008 2011 2014 2017
HICPX 2% inflation benchmark
SPF five years ahead HICP
Sources: ECB and survey of professional forecasters (SPF).
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Sources: ECB.
Figure 6a:
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
-1
0
1
2
3
4
5
1999 2002 2005 2008 2011 2014 2017
HICP inflation [L] HICPX core inflation [L]
5-years ahead inflation expectations [L] HICP average since 1999 [L]
HICP 5-years moving average [L] Real GDP growth [R]
End of technology cycle
Economic upturn and build-up of imbalances
Financial and sovereign debt crises
Low-inflation recovery% %
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
30 Sources: ECB.
Figure 7: Euro area real GDP growth and its components (annual percentage changes and percentage point contributions)
-6
-4
-2
0
2
4
6
-6
-4
-2
0
2
4
6
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Private consumption Government consumption
Gross fixed capital formation Net exports
Changes in inventories Real GDP
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
31 Sources: Bloomberg, HWWI and ECB staff calculations.
Figure 8: Global food, oil and metals prices
0
30
60
90
120
150
0
50
100
150
200
250
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Food (lhs)Metals (lhs)Oil (rhs)
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
32 Sources: ECB.
Figure 9: Growth of M3 and Monetary Financial Institutions’ credit to the private sector for the euro area (percentages per annum)
-4
-2
0
2
4
6
8
10
12
14
-4
-2
0
2
4
6
8
10
12
14
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
M3 Credit to the private sector ECB reference value
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
33 Sources: ECB.
Figure 10: Euro exchange rate against the US dollar and in effective terms (LHS: US dollar, RHS: indexed at 1999Q1=100)
60
70
80
90
100
110
120
130
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
USD/EUR (LHS) USD/EUR average over the period (LHS)
EUR effective exchange rate NEER-38 (RHS) NEER-38 average over the period (RHS)
EUR real effective exchange rate NEER-38 (RHS)
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
34 Sources: Eurostat and authors’ calculations.
Figure 11a: Current account balance (2007, in % of GDP, y-axis) and unemployment rate (2013, in % of labour force, x-axis)
BE
DE
IE
GR
ES
FR
EA
LUNL
AT
PT
FI
IT
-20
-15
-10
-5
0
5
10
15
0 5 10 15 20 25 30
BE
DE
IE
GRES
FR
IT
LU
NLAT
PT
FI
EA
-5
0
5
10
15
20
25
0 5 10 15 20 25 30
Figure 11b: Unit labour cost (cumulated growth 2002-2007 in %, y-axis) and unemployment rate (2013, in % of labour force, x-axis)
Back
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
35 Sources: Eurostat and authors’ calculations.
BE
DE
IE
GRES
FR
EA
LU
NLAT
PT
FIIT
0
5
10
15
20
25
0 5 10 15 20 25 30
BE
DE
IE
GR
ESFR
EA
LU
NLAT
PT
FI IT
-20
-10
0
10
20
30
40
50
60
70
0 5 10 15 20 25 30
Figure 11d: House prices (cumulated growth 2002-2007 in %, y-axis) and unemployment rate (2013, in % of labour force, x-axis)
Figure 11c: Credit growth (average per annum 2002-2007 in %, y-axis) and unemployment rate (2013, in % of labour force, x-axis)
Back
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
36 Sources: ECB.
Figure 12: Aggregate of euro area member countries’ fiscal policies (percent of GDP)
-8
-6
-4
-2
0
2
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fiscal stance - June 2018 BMPE Budget balance - June 2018 BMPE
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
37 Sources: ECB.
Figure 13: Euro area money and government bond market spreads (basis points)
0
50
100
150
200
250
300
0
50
100
150
200
250
300
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Spread 3m Euribor vs 3m EUR OIS Spread EA 10Y yield vs DE 10Y Bund
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
38 Sources: July 2018 ECB Bank Lending Survey.
Figure 14: Changes in euro area bank credit standards applied to the approval of loans or credit lines to enterprises and households for house purchase (net percentage of banks reporting tightening credit standards)
-25
0
25
50
75
100
-25
0
25
50
75
100
Dec.02 Jun.04 Dec.05 Jun.07 Dec.08 Jun.10 Dec.11 Jun.13 Dec.14 Jun.16 Dec.17
NFCs - actual NFCs - expected HP - actual HP - expected
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
39 Sources: ECB.
Figure 15: Composite bank lending rates for NFCs and households for house purchase in the euro area (percentages per annum)
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
2003 2005 2007 2009 2011 2013 2015 2017
NFCs Households
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
40 Sources: ECB.
Figure 16: Quantities of ECB market operations from a balance-sheet perspective (€ bn)
-2,200
-1,800
-1,400
-1,000
-600
-200
200
600
1,000
1,400
1,800
2,200
2,600
3,000
3,400
-2,200
-1,800
-1,400
-1,000
-600
-200
200
600
1,000
1,400
1,800
2,200
2,600
3,000
3,400
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
main refinancing operations 1-maintenance period refinancing operations3-month longer-term refinancing operations 6-month longer-term refinancing operations12-month longer-term refinancing operations targeted longer-term refinancing operationsoutright purchases (CBPPs, SMP, ABSPP, PSPP, CSPP) fine tuning providing operations3-year longer-term refinancing operations fine tuning absorbing operationsnet recourse to deposit facility daily reserve surplusliquidity needs (autonomous factors + reserve requirements)
Beginning of the financialturbulence
Intensification of the financial
turbulence
Start of the sovereign debt
crisis
Initiation of gradualphasing
out
First TLTRO
First 3-year LTRO
APPOMT Second TLTRO
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
41 Sources: ECB.
Figure 17: Euro area headline inflation and a 5-year moving average (year on year percentage change)
-1
0
1
2
3
4
5
-1
0
1
2
3
4
5
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
HICP 5-years moving average
Long-term average since 1999
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
42 Sources: ECB and survey of professional forecasters (SPF).
Figure 18: Average five-year ahead inflation expectations in the euro area (SPF) (LHS: percentages per annum, RHS: year-on-year percentage change)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
Apr.05 Oct.06 Apr.08 Oct.09 Apr.11 Oct.12 Apr.14 Oct.15 Apr.17
5-year rate 5 years ahead (LHS) 1-year rate 1 year ahead (LHS)
Average point estimate (RHS) Average distributional mean (RHS)
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
43 Sources: Authors, ECB, Ciccarelli and Osbat (2017).
What happened with inflation expectations in 2014? • Headline (and core)
inflation declining since 2013
• Indicators of infla-tion expectations declining (Draghi digression in Aug 2014 Jackson Hole speech)
• Risk of deanchoring inflation expecta-tions (Japan?)
• Proof of toolkit for fighting deflationary risks at/close to lower bound needed
Inflation slide
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2005 2007 2009 2011 2013 2015 2017
Longer-term market-based inflation expectations (5y5y) [L]
Short-term market-based inflation expectations (1y1y) [L]
Pass-through from current inflation to medium-term inflation expectations (5y5y) [L]
Confidence interval [L]
SPF 5-years ahead balance of risks (quartile-based measure) [R]
%Standarddeviation
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
44 Sources: Figure 2 in Hartmann and Smets (2019), 20 Jahre EZB-Geldpolitik, Zeitschrift für das gesamte Kreditwesen, vol. 72, 1 January, pp. 28-32.
Figure 18a:
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2005 2007 2009 2011 2013 2015 2017
Longer-term market-based inflation expectations (5y5y) [L]
Short-term market-based inflation expectations (1y1y) [L]
Pass-through from current inflation to medium-term inflation expectations (5y5y) [L]
Confidence interval [L]
SPF 5-years ahead balance of risks (quartile-based measure) [R]
%Standarddeviation
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
45 Sources: ECB.
Figure 19: Euro area longer-term inflation uncertainty (SPF; standard deviations)
0.0
0.2
0.4
0.6
0.8
1.0
0.0
0.2
0.4
0.6
0.8
1.0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
disagreement - standard deviation of point forecastsindividual uncertainty - average of individual standard deviationsaggregate uncertainty - standard deviation of the aggregate distribution
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
46 Sources: ECB.
Figure 20: Euro area balance of longer-term inflation risks (SPF) and inflation risk premium (RHS: number of standard deviations from zero, LHS: percentage points)
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
47 Sources: ECB.
Figure 21: Euro area excess liquidity and EONIA-DFR differential (percentage points)
0.0
0.2
0.4
0.6
0.8
0.0
0.2
0.4
0.6
0.8
0 300 600 900 1200 1500 1800
EONI
A -D
FR sp
read
Excess liquidity (€bn)
LowMedium (pre and post 3-year LTRO)High (3-year LTRO and APP)
Excess liquidity levels:
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
48 Sources: ECB, ECB Survey of Professional Forecasters and European Commission.
Figure 22: Orphanides rule for the euro area (with SPF as in Orphanides and Wieland, 2013) (percent)
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Range of prescriped changes by the policy rule using SPF forecasts Short rate changes
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
49 Sources: ECB, ECB staff projections.
Figure 23: ECB/Eurosystem staff projections for year-on-year HICP inflation and real GDP growth - horizons 0 to 8 quarters (percent)
HICP inflation Real GDP growth
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
F0 F1 F2 F3 F4 F5 F6 F7 F8
min max
25 percentile 75 percentile
median unconditional mean
-6
-4
-2
0
2
4
6
-6
-4
-2
0
2
4
6
F0 F1 F2 F3 F4 F5 F6 F7 F8
min max25 percentile 75 percentilemedian unconditional mean
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
50 Sources: ECB, ECB staff projections and European Commission. The shadow rates come from Krippner (2015), Kortela (2016), Lemke and Vladu (2017) and Wu and Xia (2017).
Figure 24: Orphanides rule for the euro area with forecasts based on ECB/Eurosystem staff projections (percent)
Back
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
51 Sources: ECB, ECB staff projections, ECB Survey of Professional Forecasters and European Commission.
Figure 25: Cumulative errors from the Orphanides rule for the euro area (percent)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1999 2002 2005 2008 2011 2014 2017
Cumulative error using ECB/Eurosystem staff projections for thepredicted rule Cumulative error using ECB/Eurosystem staff projections andinflation target of 1.76%Cumulative error using SPF and inflation target of 1.73%
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
52 Sources: ECB; Kortela (2016); Krippner (2015); Lemke and Vladu (2017); Wu and Xia (2017).
Figure 26: Estimated shadow rates for the euro area (percent)
-8
-6
-4
-2
0
2
4
6
-8
-6
-4
-2
0
2
4
6
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Lemke and Vladu LBAdativeLemke and Vladu LBMontonicKrippnerWu and XiaKortela
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
53 Sources: Bloomberg, ECB and ECB calculations.
Figure 27: Changes in key euro area financial indicators since June 2014 and the impact of ECB policy measures (basis points unless indicated)
-20
-15
-10
-5
0
-200
-150
-100
-50
0
EA 10yyield
OIS 10yyield
OIS 1yyield
NFC bondyield
Bank bondyield
Lendingrates
NEER(%,rhs)
Policy measures: credit easing, APP, and DFRChange 30 Jun 2017 - 04 Jun 2014
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
54
Sources: ECB calculations, Ashworth and Goodhart (2012), Bridges and Thomas (2012), Chen et al. (2012), Chung et al. (2011), Del Negro et al. (2011), Fuhrer and Olivier (2011), Gertler and Karadi (2013), Joyce et al. (2012), Kapetanio et al. (2012) and Pesaran and Smith (2012).
Figure 28: Comparison of the effectiveness of asset purchases in the euro area, the US and the UK
0
0.25
0.5
0.75
1
1.25
1.5
1.75
0
0.25
0.5
0.75
1
1.25
1.5
1.75
GDP level (in %) Inflation rate (in p.p.)
Chung et al. (2011) Fuhrer and Olivei (2011,max)
Fuhrer and Olivei (2011,min) Chen et al. (2012)
Del Negro et al. (2011) Gertler Karadi (2013)
EA median
EAmedian
0.0
1.0
2.0
3.0
4.0
0.0
1.0
2.0
3.0
4.0
GDP level (in %) Inflation rate (in p.p.)
Joyce et al. (2011, max) Joyce et al. (2011, min)
Kapetanios et al. (2012) Bridges and Thomas (2012)
Pesaran and Smith (2012) Ashworth and Goodhart (2012)
EAmedian
EA median
US: re-scaled to USD 1.0 tr. Purchases (peak effects)
UK: re-scaled to GBP 200 bn purchases (peak effects)
Rubric
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
55 Sources: Authors and ECB.
Table 1: Selected regression results for Orphanides Rule
Δi (1) (4) (5) (6) (7)
Inf_BMPE 0.34*** (0.09)
0.37*** (0.14)
0.33** (0.14)
0.17 (0.13)
0.36*** (0.09)
GDP_BMPE 0.37*** (0.08)
0.36*** (0.08)
0.37*** (0.08)
0.52*** (0.14)
0.40*** (0.09)
Core_Inf_BMPE -0.073 (0.16)
Pos_Inf_Dev 0.27 (0.17)
0.50*** (0.18)
Pos_GDP_Dev -0.46*** (0.17)
Change_in_credit_to_HH&NFC -0.07
(0.07)
Constant -0.62*** (0.164)
-0.56*** (0.16)
-0.60** (0.22)
-0.22 (0.20)
-0.65*** (0.16)
Inf_target 1.81 1.85 1.82
Observations 77 77 77 77 77
Adjusted R-squared 0.52 0.52 0.53 0.57 0.53
∆𝑖𝑖 = α + β 𝐸𝐸𝜋𝜋𝑡𝑡+1 − 𝜋𝜋� + γ 𝐸𝐸∆𝑦𝑦𝑡𝑡+1 − ∆𝑦𝑦� + ε
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“Noise” indicator of market liquidity in selected euro area sovereign bond markets
56 Sources: Authors and ECB.
Table 2: Timeline of ECB monetary policy measures since the breakout of the financial crisis (August 2007 to June 2018)
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Back
The interest rate increase in July 2008
Sources: Authors and ECB.
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
11
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
01/2007 07/2007 01/2008 07/2008 01/2009 07/2009
M3 growth [L] Credit growth to private sector [L]Oil (Brent Index, Jan 2007=10) [L] Unemployment rate [R]% %
25 bp rate increase on 03.07.2008
41 $
% %
25 bp rate increase on 03.07.2008139 $
77$77 $
-6
-5
-4
-3
-2
-1
0
1
2
3
4
-1
0
1
2
3
4
5
6
01/2007 07/2007 01/2008 07/2008 01/2009 07/2009
ECB HICP inflation projections June 2008 [L]ECB real GDP growth projections June 2008 [R]Real-time HICP inflation [L]Longer-term market-based inflation expectations (5y5y) [L]Real-time real GDP growth [R]
25 bp rate increase on 03.07.2008
% %
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Back
The interest rate increase in April 2011
Sources: Authors and ECB.
9
10
11
12
13
14
15
16
-2
-1
0
1
2
3
4
5
01/2010 07/2010 01/2011 07/2011 01/2012 07/2012
M3 growth [L] Credit growth to private sector [L]Unemployment rate [R] Oil (Brent Index, Mar 2010=10) [R]% %
25 bp rate increase on 07.04.2011
126 $
74 $
111 $
-6
-5
-4
-3
-2
-1
0
1
2
3
4
-1
0
1
2
3
4
5
6
01/2010 07/2010 01/2011 07/2011 01/2012 07/2012
ECB HICP inflation projections March 2011 [L]ECB real GDP growth projections March 2011 [R]Real-time HICP inflation [L]Longer-term market-based inflation expectations (5y5y) [L]Real-time real GDP growth [R]
25 bp rate increase on 07.04.2011
% %
25 bp rate increase on 07.04.2011
% %
25 bp rate increase on 07.04.2011
% %
25 bp rate increase on 07.04.2011
% %
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Back
The interest rate increase in April 2011
Sources: Authors and ECB.
75
80
85
90
95
-1
0
1
2
3
4
5
6
12/2009 06/2010 12/2010 06/2011 12/2011 06/2012 12/2012
Pass-through from current inflation to medium-term inflation expectations (5y5y) [L]NPL ratio [L]Public debt to GDP [R]% %
25 bp rate increase on 07.04.2011
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Back
The interest rate increase in July 2011
Sources: Authors and ECB.
9
10
11
12
13
14
15
16
-2
-1
0
1
2
3
4
5
01/2010 07/2010 01/2011 07/2011 01/2012 07/2012
M3 growth [L] Credit growth to private sector [L]Unemployment rate [R] Oil (Brent Index, Mar 2010=10) [R]% %
25 bp rate increase on 07.07.2011126 $
74 $
111 $
-6
-5
-4
-3
-2
-1
0
1
2
3
4
-1
0
1
2
3
4
5
6
01/2010 07/2010 01/2011 07/2011 01/2012 07/2012
ECB HICP inflation projections June 2011 [L]ECB real GDP growth projections June 2011 [R]Real-time HICP inflation [L]Longer-term market-based inflation expectations (5y5y) [L]Real-time real GDP growth [R]
25 bp rate increase on 07.07.2011
% %
25 bp rate increase on 07.07.2011
% %
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Back
The interest rate increase in July 2011
Sources: Authors and ECB.
75
80
85
90
95
-1
0
1
2
3
4
5
6
12/2009 06/2010 12/2010 06/2011 12/2011 06/2012 12/2012
Pass-through from current inflation to medium-term inflation expectations (5y5y) [L]NPL ratio [L]Public debt to GDP [R]% %
25 bp rate increase on 07.07.2011
Rubric
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ECB interest rates “low” since the second quarter of 2009 or the third quarter of 2012
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
62
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Interest rate on the marginal lending facility Interest rate on the main refinancing operations
Overnight interest rate (EONIA) Interest rate on the deposit facility
• Overall 6 to 9 years, depending on what is regarded as “low”
• Consequence of financial and sovereign debt crises
• Negative component since June 2014: deposit facility rate (DFR) moved from 0 to -40 basis points
• Due to ample liquidity policy, overnight rate close to DFR
• NB: other measures!
Sources: ECB.
Main ECB policy rates and EONIA (per cent)
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Deposit facility rate reductions below zero flattened the risk-free yield curve and shifted it down
63
• Disinflationary forces after sov. debt crisis (mid-2013 and on)
• Three-pronged easing strategy: – Negative interest rate policy (NIRP) – Targeted longer-term ref. operations – Various asset purchase programs
• NIRP removes non-negativity constraint on future expected short rates
• Charge on cash hoarding triggers portfolio shifts towards long-term bonds compressing term premium
• Movements as broadly predicted in novel yield curve models (Lemke and Vladu 2017)
• Imply stimulating effects on invest-ment and consumption Notes: Forward curve is estimated using spot Overnight Index Swap (EONIA) rates.
Sources: Thomson Reuters and ECB calculations.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2014 2016 2018 2020 2022 2024
pre-Jun 2014 GC (4 Jun 14) pre-Sep 2014 GC (3 Sep 14)
(26/05/2016) Latest (3 Sep 18)
EONIA forward curves before and after ECB rate reductions below zero (percentage points)
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Notes: Annual total loan volumes (end of year) indexed to 2013 levels for 70 large euro area banks. Bank sample is split in terciles of deposit ratios, which are defined as total deposits divided by total assets in 2013. Sources: Heider et al. (2018), Figure 6, using SNL Financial data.
The policy also contributed to higher lending of banks relying less on deposit funding
64
• Banks with low deposit-to-asset ratios benefited from funding advantages
• Extended lending relative to high deposit-ratio banks (Heider et al. 2018)
• Led to net lending increase in the aggregate (Demiralp et al. in progress)
• Potential “reversal rate” (Brunner-meier and Koby 2018) not reached
• NB: Accompanying TLTRO-2 pricing
• But initial capital gains on securities portfolios offset over time by reductions in net interest margins
Total bank lending before and after ECB rate reductions below zero (by deposit ratios)
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Bank profitability implications of negative policy rates: positive effects offset negative ones so far
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
65
• NB: Sizeable differences across countries and individual banks
• ECB Banking Supervision’s SREP stress tests found that most Euro-pean banks could weather a 200 bp interest rate shock (ECB 2017)
• Many other dimensions than banks (ESRB 2016, CGFS 2018): – Profitability and solvency of life insurers
and pensions funds – Search for yield (real estate, fixed income) – Accelerated transition to market-based
financial structure
Notes: Capital gains based on data on a consolidated basis for 68 euro area banking groups included in the list of significant institutions under direct ECB supervision and in the 2014 EU-wide stress test. Other estimates based on aggregate banking statistics. Euro area aggregate calculated as average of the countries included in the sample, using the ECB’s consolidated banking data for weighting. NII stands for net interest income and EL for excess liquidity. Sources: Altavilla et al. (forthcoming).
Simulated deviations of banks’ return on assets from a no policy scenario (all monetary policy measures, p.p.)
-0.2
-0.1
0.0
0.1
0.2
-0.2
-0.1
0.0
0.1
0.2
2014 2015 2016 2017
Capital gainsCredit qualityEL ChargeInterest expensesInterest income exc. EL chargeNet effect
(provisions)
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Property price developments are within (or below) regular ranges and below historical boom dynamics
“Noise” indicator of market liquidity in selected euro area sovereign bond markets
66
• No general property bubble in the euro area
• A few countries and/or large cities have nevertheless high property price growth now
• In some countries risks may be particularly pronounced in commercial real estate
• A number of prudential policy actions have been taken in those cases Notes: Real house price indexes based on residential property price and
consumer price indexes of euro area countries between 1975Q1 and 2018Q1. Identification of troughs and peaks following Harding and Pagan (2002). Red dotted line refers to the median for all upswings covered in the fourth quartile (historical “booms”). Grey area refers to the range of all upswings covered in the second and third quartile (historically “normal” upswings). Sources: BIS, ECB, Fed Dallas, OECD and ECB calculations.
Post-crisis real house prices compared to boom periods and normal ranges (Q4 2013 and historical troughs normalised to 100)
80
100
120
140
160
180
T-20 T-12 T-4 T+4 T+12 T+20
NORMAL BOOMS EADE FR ITES NL BE
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