the first 20 years of the european central bank: monetary policy · 2019-07-16 · the first 20...

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)

Presenter

Presentation Notes

We would like to thank Jacopo D’Andria, Philipp Hochmuth, Giuditta Perinelli, Desislava Tartova, Hannes Twieling, Lea Steiniger and Alexia Ventula Veghazy for excellent research assistance.

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

Rubric

www.ecb.europa.eu ©

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

Rubric


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

Rubric


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

Rubric


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


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


10

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Annex

11

Rubric


Jan1999-Jun2003: The technology bubble and the ECB’s first interest rate cycle

12

Back


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

Rubric


Jan1999-Jun2003: The technology bubble and the ECB’s first interest rate cycle

13

Back


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% %

Rubric



14

Back


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

Rubric



15

Back


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%

Rubric


Aug2007-Jun2013: The financial crisis, the double-dip recession and non-standard monetary policy

16

Back


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


Rubric


Aug2007-Jun2013: The financial crisis, the double-dip recession and non-standard monetary policy

17

Back


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%


Rubric


Back

Jul2013-Jun2018: Addressing the lower bound of interest rates and the low-inflation recovery


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

Rubric


Jul2013-Jun2018: Addressing the lower bound of interest rates and the low-inflation recovery

Back


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%

Rubric


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


20

Rubric




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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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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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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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)

Rubric



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)





Low-inflation recovery


Chronological overview in four sub-periods

Sources: European Commission spring 2018 forecast; IMF World Economic Outlook April 2018; OECD Economic Outlook May 2018; ECB.

Rubric




Figure 4: Four cyclical phases during the first twenty years of the euro – key macroeconomic and monetary policy variables and major events

Rubric



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

Rubric


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).

Rubric


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]




Low-inflation recovery% %

Rubric



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

Rubric



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)

Rubric



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

Rubric



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)

Rubric



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

Rubric



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

Rubric



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

Rubric



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

Rubric



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

Rubric



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



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



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



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



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

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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



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

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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



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

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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

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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



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



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

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3.0

3.5

4.0

-1.0

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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



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

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0.0

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1.0

1.5

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Rubric



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

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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



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

Rubric



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



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




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

Rubric




Table 2: Timeline of ECB monetary policy measures since the breakout of the financial crisis (August 2007 to June 2018)

Rubric


Back

The interest rate increase in July 2008


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

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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]


% %

Rubric


Back

The interest rate increase in April 2011


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]% %


126 $

74 $

111 $

-6

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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]


% %


% %


% %


% %

Rubric


Back

The interest rate increase in April 2011


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]% %


Rubric


Back



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

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-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]


% %


% %

Rubric


Back



75

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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]% %


Rubric


ECB interest rates “low” since the second quarter of 2009 or the third quarter of 2012


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)

Rubric


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

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1.0

1.5

2.0

2.5

3.0

-1.0

-0.5

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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)

Rubric


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)

Rubric


Bank profitability implications of negative policy rates: positive effects offset negative ones so far


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)

Rubric


Property price developments are within (or below) regular ranges and below historical boom dynamics


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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