ecb monetary policy - cemla · 2020-01-09 · ecb monetary policy past, present and future Óscar...
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ECB MONETARY POLICYPast, present and future
Óscar Arce
DG Economics, Statistics and Research. Banco de España
XV MEETING OF MONETARY POLICY MANAGERS
CEMLA-BCRD, Santo Domingo, República Dominicana
26-27 September 2019
2
THE EURO AREA HAS WITNESSED DISINFLATIONARY PRESSURES SINCE 2013
Source: Eurostat. Last observation: 2019 August.
-1
0
1
2
3
4
5
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
HICP INFLATION CORE INFLATION
INFLATION%
Eu
rop
ean
Sta
bili
ty M
ech
an
ism
Fir
st
EB
Astr
ess t
est
Leh
man
failu
re
US
tap
er
tan
tru
m
Eu
rop
ean
Fin
an
cia
lS
tab
ility
Facili
ty
Gre
ece
req
uests
fin
an
cia
lassis
tan
ce
UK
Bre
xit
refe
ren
du
m
2 %
3
PER CAPITA GROWTH IN THE EURO AREA HAS BEEN DISAPPOINTING SINCE 2012, WITH RISING DIVERGENCES ACROSS MEMBERS
Sources: Datastream and European Commission
85
90
95
100
105
110
115
07 08 09 10 11 12 13 14 15 16 17 18 19
EURO AREA UNITED STATES JAPAN
GROWTH OF THE REAL GDP PER HEAD OF POPULATION(2010 prices; 2007=100)
85
90
95
100
105
110
115
07 08 09 10 11 12 13 14 15 16 17 18 19
EURO AREA GERMANY FRANCE
ITALY SPAIN
4
OVER THE DIFFERENT PHASES OF THE CRISIS, THE ECB HAS DEPLOYED A PACKAGE OF MUTUALLY REINFORCING MEASURES
Source: European Central Bank. Last observation: Rates, 19 September 2019; Balance sheet: 12 September 2019.
-1
0
1
2
3
4
5
6
-1
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
DEPOSIT FACILITY RATE MROs RATE EONIA EUROSYSTEM BALANCE SHEET (right scale)
EUROSYSTEM BALANCE SHEET AND INTEREST RATES%
Dra
gh
i "W
hate
ver
it t
akes"
Fir
st
VL
TR
O
Fix
ed
-rate
full
allo
tmen
tte
nd
ers
Fir
st
forw
ard
gu
idan
ce
Exp
an
ded
AP
P
Secu
uri
ties
Mark
ets
Pro
gra
m
An
no
un
cem
en
texp
ecte
den
do
f A
PP
An
no
un
ced
new
packag
e
Exp
an
sio
nA
PP
to
EU
R 8
0b
n p
er
mo
nth
€ trn
5
THE ECB’S MONETARY POLICY RESPONSE HAS BEEN COMPARABLE TO THAT IN OTHER LARGE ADVANCED ECONOMIES
Sources: Datastream, European Central Bank and Banco de España. Last observations: Rates,19 Sep 2019; Balance sheet: Eurosystem,12 Sep 2019; FED, 11 Sep 2019; BoJ, 09 Sep 2019; BoE,
-1
0
1
2
3
4
5
6
07 08 09 10 11 12 13 14 15 16 17 18 19
EUROSYSTEM
FEDERAL RESERVE
BANK OF JAPAN
BANK OF ENGLAND
%
POLICY INTEREST RATES
0
20
40
60
80
100
120
0
10
20
30
40
50
60
08 09 10 11 12 13 14 15 16 17 18 19
EUROSYSTEM
FEDERAL RESERVE
BANK OF JAPAN (right scale)
BANK OF ENGLAND
% of GDP 2017
CENTRAL BANKS BALANCE SHEET
% of GDP 2017
6
THESE MEASURES HAVE BEEN EFFECTIVE AT EASING FINANCIAL CONDITIONS, SUCH AS YIELD CURVES…
Source: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem, Yiangou (2019), forthcoming.
Notes: The chart shows the impact of ECB non-standard measures on the GDP-weighted aggregate of euro area sovereign bond yields.
UPWARD PRESSURES ON EURO AREA SOVEREIGN BOND YIELDSIN ABSENCE OF ECB’s NON-STANDARD MEASURES 2014-2018
% per annum
NEGATIVE INTEREST RATE POLICY (NIRP) FORWARD GUIDANCE (FG) APP
7
…WHICH IN TURN HAVE STIMULATED GROWTH AND INFLATION OVER THE PERIOD 2014-2018
CONTRIBUTION OF ECB NON-STANDARD MEASURES TO REAL GDP GROWTH
2014-2018
% per annum
Source: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem, Yiangou (2019), forthcoming.
Notes: The chart shows the impact of ECB non-standard measures on macro variables based on a macroeconomic model withfinancial variables conditioning on the yield curve impact shown in the previous slide.
% per annum
CONTRIBUTION OF ECB NON-STANDARD MEASURES TO HICP INFLATION
2014-2018
8
ANALYSIS BY BANCO DE ESPAÑA STAFF CONFIRMS THE EFFECTIVENESS OF ECB BALANCE-SHEET POLICIES (APP, TLTRO)
Source: Banco de España. Estimated effects based on the model of Burriel and Galesi (2018).
• Accumulated effects over the period 2015-18: 2.4% for GDP, 1.8% for HICP.
9
IN 2019, WE FACE AGAIN THE THREAT OF A DISANCHORING OF INFLATION EXPECTATIONS…
Sources: Thomson Reuters and Banco de España. Last observation: 19 September 2019.
1,00
1,25
1,50
1,75
2,00
2,25
2,50
2,75
3,00
3,25
3,50
2011 2012 2013 2014 2015 2016 2017 2018 2019
EURO AREA UNITED STATES
FIVE-YEAR FORWARD BREAK-EVEN INFLATION RATE FIVE YEARS AHEAD
%
Dra
gh
i"W
hate
ver
it t
akes"
Neg
ative D
FR
Dra
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i's s
peech
at
Jackso
n H
ole
Exp
an
ded
AP
P
TL
TR
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ate
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t
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ap
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an
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ng
er
forw
ard
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Sin
tra s
peech
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Pexte
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calin
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An
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Pexte
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d s
calin
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n
10
Sources: IHS Markit and CPB. Last observation: PMI, August 2019; Trade, June 2019.
• The world economy slowed down in the second quarter and high-frequency indicators point to a
continuation of this trend in the next months.
• World trade slowed down against a background of growing uncertainty over the trade policy of US and
China.
… IN A CONTEXT OF DECELERATING GLOBAL GROWTH AND RISING RISKS
48
49
50
51
52
53
54
55
56
2014 2015 2016 2017 2018 2019
MANUFACTURING. CONSUMER GOODSMANUFACTURING. INVESTMENTS GOODSMANUFACTURING. INTERMEDIATE GOODSSERVICES
GLOBAL PMI
Index
-2
-1
0
1
2
3
4
2017 2018 2019
WORLD TRADE GROWTHq-o-q, 3 month moving average
OTHERS AFRICACHINA LATIN AMERICAEMERGING ASIA EMERGING EUROPEEURO AREA JAPANUNITED STATES WORLD TRADE
%
46
48
50
52
54
56
58
60
62
2016 2017 2018 2019
GLOBAL UNITED STATES
EURO AREA EMERGING
MANUFACTURING PMI
11
• Generalized and recurrent downward revisions for growth, in 2019, for both advanced and emerging
economies.
Source: Consensus. Last observation: September 2019, except Emerging Asia excluding China (August 2019) and Eastern Europe (August 2019)
… IN A CONTEXT OF DECELERATING GLOBAL GROWTH
0
1
2
3
4
5
6
7
Jan 2
01
8
Ap
r 20
18
Jul 2
01
8
Oct
201
8
Jan 2
01
9
Ap
r 20
19
Jul 2
01
9
CHINA LATIN AMERICA
EMERGING ASIA EASTERN EUROPE
GDP PROJECTIONS FOR 2019EMERGING ECONOMIES
% y-o-y
0,0
0,5
1,0
1,5
2,0
2,5
3,0
Jan 2
01
8
Ap
r 201
8
Jul 2
01
8
Oct
201
8
Jan 2
01
9
Ap
r 201
9
Jul 2
01
9
UNITED STATES EURO AREA
UNITED KINGDOM JAPAN
GDP PROJECTIONS FOR 2019DEVELOPED ECONOMIES
% y-o-y
12
US-CHINA TRADE CONFLICT: THE EFFECTS ON THE GLOBAL ECONOMY ARE ALREADY MATERIALIZING
Source: Banco de España.
-0,60
-0,45
-0,30
-0,15
0,00
US China Euro area RoW World
TRADE CONFLICT ESCALATION: GDP IMPACT IN Q4 2021
Tariffs from May to end-2019 Add mild uncertainty effects
%, deviation from baseline
• The escalation of trade tensions between China and
the US entered a new phase in May 2019
• The increase in protectionism appears to be
significantly affecting global economic activity
through a variety of channels…
• …both direct (Demand, prices of goods)
• …and indirect (Confidence, risk aversion)
• We estimated the impact on the global economy
using the NiGEM macroeconometric model
• For the euro area, the impact on GDP is
roughly -0.2%, reflecting its high degree of
trade openness, rendering it more vulnerable
to the fall in global activity
• Impact of uncertainty difficult to gauge
13
BREXIT: UNCERTAINTY PERSISTS AS OCTOBER 31ST APPROACHES
Source: IMF WEO, April 2019.
• The UK economy has deteriorated further on
account of heightened uncertainty about how and
when it will leave the EU...
• The arrival of the new Cabinet in July increased the
likelihood of a no-deal scenario
• Despite some legal actions taken by the other
parties in UK Parliament to deter a no-deal beyond
October 31st, the timing and the outcome of such
measures are still largely uncertain
• In the last weeks, on the other hand, the UK
Government appears to have become more prone
to reaching an agreement.
• …all of the former notwithstanding, a no-deal path
would have a noticeable negative impact in the euro
area economy
-0,7
-0,6
-0,5
-0,4
-0,3
-0,2
-0,1
0
2018 2019 2020 2021 2022 2023
EU: GDP IMPACT OF NO-DEAL BREXIT
SCENARIO A: INCREASE IN TARIFFS WITH THE EU, NO TRADEAGREEMENT WITH THIRD PARTIES, MILD TIGHTENING OFFINANCIAL CONDITIONS
SCENARIO B: (A) + INCREASE IN IMPORT COSTS FOR HH ANDFIRMS, STRONG TIGHTENING OF FINANCIAL CONDITIONS
%, deviation from baseline
14
TURKEY HAS BOTTOMED OUT AND ECONOMIC CONDITIONS ARE GRADUALLY IMPROVING, BUT DOMESTIC RISKS PERSIST
CONFIDENCIAL
Sources: Central Bank of Turkey and Turkish Statistical Institute.
3,5
4,0
4,5
5,0
5,5
6,0
6,5
7,0
9
13
17
21
25
29
2018 2019
INFLATION Effective official interest rate
Lira/dollar (RHS)
EXCHANGE RATE, OFFICIAL INTEREST RATE AND INFLATION
% lira/dollar
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14 15 16 17 18 19
EXTERNAL DEMAND INTERNAL DEMAND
REAL GDP (Y/Y) REAL GDP (Q/Q)
GDP GROWTH RATE AND CONTRIBUTIONS
%
Note: the weight of Turkey in Euro Area exports is around 2.5%
15
ECB MONETARY POLICY PACKAGE IN RESPONSE TO DETERIORATING GROWTH AND INFLATION OUTLOOK
The ECB adopted a comprehensive package of measures in its last policy meeting (12 September):
• 10 bps reduction of deposit facility rate (from -0.40% to -0.50%) with two-tier system
• Reinforced state-contingent forward guidance
• Reactivated APP: monthly 20 billion EUR starting from 1st of November and without a defined time limit
• Dropped the 10 bps spread on rate of TLTROs and extended the maturity from 2 to 3 years
16
MONETARY POLICY GOING FORWARD: REVIEW OF MONETARY POLICY STRATEGIES
• Several major central banks are conducting reviews of their monetary policy strategies
• There is room for including modification/clarification of the ECB’s price stability definition
• Current inflation aim: “below, but close to, 2 percent” over the medium term
• Possibility of introducing specific point target (e.g. 2 percent)…
• … with symmetric interpretation: both negative and positive (transitory) deviations
• Would allow to make state-contingent forward guidance more precise and effective
17
MONETARY POLICY GOING FORWARD: AN ENVIRONMENT OF LOW NATURAL INTEREST RATES
SOURCE: Banco de España Annual Report 2018, based on the model of Fiorentini, Galesi, Pérez-Quirós andSentana (2018). The bands for the euro area refer to confidence levels of 68% and 90%.
• The natural interest rate (r*) is a key determinant of policy interest rates
• Evidence of sustained decline in recent decades, reflecting different factors: demographics (e.g. Eggertsson & Mehrotra, 2014), low productivity growth (Gordon, 2015), safe asset scarcity (Caballero & Farhi, 2017), etc.
18
MONETARY POLICY GOING FORWARD: AN ENVIRONMENT OF LOW NATURAL INTEREST RATES
• A low (and falling) r* implies that the effective lower bound (ELB) may be more and more binding in the future
• If reversal rate (Brunnermeier & Koby 2018) higher than “switch-to-cash” ELB, conventional policy space may be even smaller
• No conclusive evidence that we are already at the reversal rate…
• … but if rates remain negative for long this may end up hampering bank-based monetary transmission (e.g. Arce et al. 2018)
• In this environment, rethinking MP strategy becomes an valuable option:
• Possibility of introducing “make up” strategies such as average inflation targeting
• Would be consistent with medium-term orientation of inflation aim
19
THE ROLE OF OTHER ECONOMIC POLICIES
• Monetary cannot be “only game in town”
• Completing Banking Union is a priority for further deepening the monetary union
and reducing vulnerabilities
• Further progress in the Capital Market Union project is needed to boost private-sector risk-sharing channels
- capital markets contribute to soften more than 40% of an adverse shock in a particular
US State, just 10% for euro area countries -
• Build a common fiscal stabilization capacity to smooth aggregate and country
specific shocks (public risk-sharing)
• Need for countercyclical fiscal policy in countries with fiscal space
• Need for structural reforms that raise competition and increase the potential growth
of the economy (Andrés, Arce and Thomas, 2017)
- Productivity growth in the euro area is low: between 2000-2018 total factor
productivity in the US increased by near 12%, only 5,7 % in the euro area -
• Positive synergies from joint implementation of monetary, fiscal and structural
policies (Arce, Hurtado and Thomas, 2016)
THANK YOU FOR YOUR ATTENTION
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