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Monetary policy impacts

Context

The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term. To this end, the ECB uses interest rates and since the 2008 crisis also non-standard measures (Asset purchase programmes, Targeted longer-term refinancing operations (TLTROs)…) to affect financing conditions in the economy.

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility are at 0.00%, 0.25% and -0.50% respectively. These three interest rates have been left unchanged since September 2019 when the deposit facility was lowered from 0,4% to -0,5%. The targeted longer-term refinancing operations (TLTROs) are Eurosystem operations that provide financing to credit institutions. By offering banks long-term funding at attractive conditions, they preserve favourable borrowing conditions for banks and stimulate bank lending to the real economy.

In January 2015 the ECB announced a programme of public and private securities purchases which started on 9 March 2015. This is intended to boost activity in order to bring inflation to an annual rate close to its 2% target. From March 2015 to December 2018, the ECB purchased 2.6 trillion securities.

On 12 September 2019 the ECB Governing Council decided that “net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November 2019.

Following the coronavirus pandemic, the European Central Bank’s governing Council has decided on 18 March 2020 to launch a new Pandemic Emergency Purchase Programme of up to €750bn until the end of 2020 on top of the €120b in extra purchases announced on March 12 under the APP. The Governing Council decided to increase this PEPP envelope by €600bn in June 2020, and by €500bn in December 2020, to a total of €1 850bn. The programme is temporary and designed to contribute to preserving favorable financing conditions over the pandemic period.

In December 2021, the Governing Council announced a step-by-step reduction in the pace of asset purchases from the first quarter of 2022, discontinuation of PEPP net purchases at the end of March 2022, and flexible reinvestments until at least end-2024.

The size of the Eurosystem’s balance sheet reached a historical high of €8,6tr at the end of 2021, an increase of €1.6tr compared with the end of previous year. Even before the Russian invasion of Ukraine, prices had risen to multi-decade highs in many countries including the US and the eurozone. In the euro area, the Harmonized Index of Consumer prices (HICP) growth rate has been surpassing the ECB’s 2% target since May 2021 and reached 7.5% in April 2022, a record high since the creation of the Monetary Union.

The Eurofi papers presented below detail the positive and negative aspects regarding the on-going ultra-accommodative monetary policies and suggest ways out of the monetary policy deadlock.

Contributions to the policy debate

Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)

Public and private
sector views

ECB needs to change gear - February 2022 new

J. de Larosière - Former President, Eurofi

Normalizing monetary policy - February 2022 new

Boris Vujčić - Croatian National Bank | Robert Holzmann - Oesterreichische Nationalbank | Yannis Stournaras - Bank of Greece | Mārtiņš Kazāks - Bank of Latvia | Boštjan Vasle - Bank of Slovenia | Tanate Phutrakul - ING Group | Dino Kos - CLS | Andreas Dombret - Oliver Wyman

Central banks must change course to avoid possible financial crisis - September 2021

J. de Larosière - Former President, Eurofi

Normalizing monetary policy: when and how? - September 2021

Robert Holzmann - Oesterreichische Nationalbank | Boris Vujčić - Croatian National Bank | Mārtiņš Kazāks - Bank of Latvia | Cyril Roux - Groupama | Dino Kos - CLS Bank International | Didier Borowski - Amundi | Andreas Dombret - Oliver Wyman

Is current monetary policy doing more harm than good and are there alternatives? - September 2020

Jacques de Larosière - EUROFI | Boris Vujčić - Croatian National Bank | Klaas Knot - De Nederlandsche Bank | Madis Müller - National Bank of Estonia | Jordi Gual - CaixaBank | Xavier Larnaudie-Eiffel - CNP Assurances | Alexandra Dimitrijevic - S&P Global Ratings