L6 - ECB &Monetary Policy Flashcards
Eurosystem
ECB and NCB
same monetary policy
fundamental aim to ECB:
maintain price stability (inflation <2%) without interfering with this duty it will
“support the general economic policies of the Community”
ECB do it through management of monetary policy
ECB is independent of government
problem of deflation if Euribor <0
interesting to see after all this years of positive inflation target, effort to buy bonds so as to increase credit in Economy
IR have decrease –> inflation still close to 0
ECB monetary policy
single monetary policy - action so as to maintain
prudential supervision of loan entities and stability of financial system (IR, inflation etc) to promote economic growth
key determinant fo currency changes
authorise issue of bank noes in eurozone
SSM: single supervision mechanism (small banks by country CB, big banks by ECB)
SRM = single resolution mechanism (sell to Santander)
price stability
- improves decision criteria (consumer)
- investment vs savings change according to Ir and economic climate
- “reduced inflation premium” - add. demand of investors adding to profitability of return
ECB
Interest transfer mechanism
low IR implies higher demand (for investment)
price increase
dimmed. when EONIA or Euribor changes - rates on loan changes (bank ir changes - adjustment)
low it –> high prices, high money loan, high ER
Cornerstone of MP
A) Economic analysis:
- st,mt determinant of price performance - actual activity, financial state of economy
b) Monetary analysis:
- amount of money in economy (hard to manage especially as open market exists)
- long term link between money and prices
monetary and credit developments
Instruments of MP
decisions taken by ECB board meetings
but national CB of countries that make up eurozone put the INTO PRACTICE
1. open market
- control IR, market liquidity, direct MP
- banking reserve requirements
- minimal Reserve: portion of bank´s Labilties that must be held by financial bodies in reserves (Deposit) with CB - permanent loan and deposit facilities
- provide vs absorb liquidity
- control overnight market IR
- managed by national CB in a decentralised manner
MP
Additional financing instruments
due to crisis:
LTROS:
- longterm refinancing operations - amount banks can borrow (depends on loans o non-financial corp or household)
TLTROS:
- operations up to 4ys - aim to facilitate private sector credit conditions - stimulate bank lending to real economy
APP
- asset purchased program
- create money to buy bonds (increase asset side)
PEEPP
- pandemic emergency purchase program
- plan created because of covid
- nonstandard MP - euro instability caused of corona
- same assets as APP
Auctions &
Guarantees
open market operations through AUCTIONS
fixed or variables, but mostly ECB uses fixed
loan put in place using REPOS
= temporary operations consisting in sale of securities with repurchase agreement
- two types of listing assets (diff. quality guaranteed depending on country)
TARGET 2
Trans European Automated Real time Gross setleemts Express Transfer System
= monetary transaction clearin g house in Europe
centralised system - interconnection of each country´s payment system
- payments settled individually
- payee must have a balance within account corresponding to CB, or backed up by necessary credit
Credibility
Reputation
credibility key fo building
PRICE STABILITY &PRICING MECHANISM
increase probability of fulfillment
reputation - clear-well-defined objectives, cont. monitoring
independence
influences entities expectations and inflationary outlook
makes one-off intervention more effective
prudent decision making
unanimous opinion, clear consistent message
E.g. draggy message
power of ECB president message o decrease risk premiums of Italian and Spanish bonds
Quantitative Easing
idea
if you cannot manage inflation with IR
manage through money:
- CB creates money
- CB buys bonds (BANKS not government)
mov money when IR are by low (hence monetary possible is impossible)
you cannot heat economy using IR as it is 0% - negative IR ?
add money - loans cheaper - cheaper cost of financing
stipulate demand, consumption ,growth
QE
definiton
unconventional MP sed by CB to stipulae nationally economy
when conventional MP has become inefficient
buys financial assets from commercial banks, hence injecting cash in economy
APP of ECB
but NOT buying selling government bonds - this is rather to keep market IR at specific target level
increase execess reserve of banks, loand can be given out, raises asset prices, hence lowe yield, increase investment, deposits
QE
goal
increase money supply rather than DECREASINg rate (which cannot be further decrease !!!)
consider “last resort” to stimulate economy
QE and MP in general only successful if CB control CURRENCY
(CB of countries in EU cannot unilaterally expand their money supply, hence QE) - rely on ECB to set MP
QE
increase supply of money
ECB creates money
- monetary supply increases
- increase reserve of banks to give loans
b) buys bond
- price increases hence IR decreases
- people invest or take loan at lower IR
main message:
low IR, negative on deposits (pay if having excess reserves, rather interbak lending)
start of new purchase ABS and covered bonds to boost economy &inflation
Covid Crisis
great lockdown
expected recesson n 2020 wost than FC 2008 but strong economic growth in 2021
IMF forecasts 4.9% contraction in global output due to covid
impact in different economies is different
(e.g. spain intalian greater, especially tourism)
Covid
a) EU measures
own resource decision
empower commission to borrow in on capital markets on behalf on union 770 billion
52% expenses - 48% loans
union will use funds for sole purpose to cover debt of covid crisis
countries reimbursement in such way that steady predictable reduction in liabilities (2058)
