Monetary policy: How to cope with unconventional policy

Monetary policy: How to cope with unconventional policy Panel discussion at GIC’s Central Banking Series: Japan; Tokyo, 13 November 2017 Monika Moede, Deutsche Bundesbank, Head of Representative Office Tokyo

What's the current situation in the euro area?

Monika Moede 13/11/2017 page 2

What's the current situation in the euro area?

Development of inflation in the euro area

Source: Source:Eurostat, Eurostat,June June2017 2017

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What's the current situation in the euro area?

Key interest rate of euro area in comparison with other important economic regions

Great Britain

Euro Area (interest rate for main refinancing operations)

USA Japan

Source: based on publications of respective central banks, October 2017

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Current figures:

1 - 1,25% 0,50% 0,00% 0 - 0,10%

What's the current situation in the euro area?

Current economic facts

real GDP growth +0,7% Q2 (+2,3 YoY)

unemployment rate 9,1% (lowest rate since 02/2009)

Source: Data on basis of current published statistics

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annual growth of loans to non-financial corporates +2,5%

annual growth of loans to households +2,7%

inflation rate +1,5%

annual growth rate of M3 +5,1%

What's the current situation in the euro area?

Recent headlines (before ECB Monetary Policy Decision from 26 October 2017)

Source: Reuters.com, 13/10/2017

Source: Bloomberg.com, 24/10/2017

Source: FinancialTimes.com, 23/10/2017

Source: Reuters.com, 28/09/2017

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Source: FinancialTimes.com, 12/10/2017

What has been done to cope with the crisis apart from standard monetary policy measures?

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What has been done to cope with the crisis apart from standard monetary policy measures? interest rate of main refinancing operations = zero

asset purchase programme APP (2015, ABS-PP, Covered-Bond-PP, Corporate-Sector-PP, Public-Sector-PP)

announcement of outright monetary transactions OMT (2012, not active)

low/negative interest rates

negative interest rate for deposit facilities

forward guidance

purchase programmes liquidity measures

securities markets programme SMP (2010) Monika Moede 13/11/2017 page 8

introducing longer-term refinancing operations

reducing minimum reserve ratio for deposits

fixed rate and full allotment of tenders

since July 2013 forward guidance on interest rates to - better influence financial market expectations - enhance the intended monetary policy easing effect

relaxation of collateral framework

What are possible strategies to exit non-standard monetary policy measures?

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What are possible strategies to exit non-standard monetary policy measures?

Possible strategies might differ regarding‌ - ‌timing and pace of adjusting key interest rates; - ‌changes to the range of basis points between key interest rates (interest rates for main financing operations and standing facilities).

low/negative interest rates ECB Monetary Policy Decision on 26 October 2017 - interest rates on main refinancing operations (0,00%), marginal lending (0,25%) and deposit facilities (-0,4%) remain unchanged - continuous forward guidance on key interest rates (still linkage between potential adjustments of key interest rates and development of APP)

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What are possible strategies to exit non-standard monetary policy measures?

purchase programmes

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Possible strategies might differ regarding…

- …strict vs. smooth termination (e.g. prolongation of asset purchase programmes with lower volumes for a limited time) - …stop or reduced volumes of parts of asset purchase programmes (e.g. stop of ABSPP, CSPP or CBPP while PSPP continues) - …reinvestments vs. sell of purchased assets ECB Monetary Policy Decision on 26 October 2017 - asset purchase programmes will continue with monthly €60 billion until end of December 2017 - reduced volume of €30 billion from January until end of September 2018 - reinvestment of principal payments from maturing securities purchased under the APP in the same jurisdiction (supported by additional information on monthly redemption amounts for APP over a rolling 12-month-horizon) - continuous forward guidance on APP development

What are possible strategies to exit non-standard monetary policy measures?

liquidity measures

Possible strategies might be…

- …return to competitive tender allotments - …raising minimum reserve ratio for deposits - …tightening collateral framework - …repayment of longer-term refinancing operations without further prolongations

ECB Monetary Policy Decision on 26 October 2017 - continuation of fixed rate tender with full allotments “…for as long as necessary, and at least until the end of the last reserve maintenance period of 2019.”

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What are possible strategies to exit non-standard monetary policy measures? forward guidance

In usual times no pre-commitment of ECB regarding future actions 2006 (02/03/2006 Trichet) As you know, we never pre-commit ourselves unconditionally.

(05/10/2006 Trichet) It is part of our own strategy, as you know, never to pre-commit in advance, in the medium term.

2010 (04/03/2010 Trichet) With regard to our monetary policy stance, as you know, we never precommit, we always take the decision that we judge appropriate so that we are never trapped by a pre-commitment that would appear not exactly appropriate later on. That is part of our overall concept of monetary policy.

2011 (03/11/2011 Draghi) I mean the answer to this question – as you know by now, after eight years with Jean-Claude Trichet – is that we never pre-commit.

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What are possible strategies to exit non-standard monetary policy measures?

In July 2013, ECB introduced forward guidance

forward guidance

2013 (04/07/2013 Draghi) Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.

2016 (announcement of linkage between development of APP and key interest rates) (10/03/2016 Draghi) Finally, looking ahead, taking into account the current outlook for price stability, the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.

2017 (still linkage between development of APP and key interest rates) (26/10/2017 Draghi) The Governing Council continues to expect the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

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What are possible strategies to exit non-standard monetary policy measures? forward guidance

2017 (still no final commitment to end the APP) (26/10/2017 Draghi) From January 2018 the net asset purchases are intended to continue at a monthly pace of â‚Ź30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration.

Possible strategies regarding change of wording of public announcements‌ - ‌regarding timing/volume/order/dependence of exit strategies of the different nonstandard monetary policy measures.

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What are possible strategies to exit non-standard monetary policy measures?

Press reactions on Monetary Policy Decision from 26 October 2017

Source: BusinessInsider.com, 26/10/2017

Source: Reuters.com, 26/10/2017

Source: Bloomberg.com, 27/10/2017

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Source: FincancialTimes.com, 26/10/2017

What are possible strategies to exit non-standard monetary policy measures?

Valuation of Monetary Policy Decision on 26 October from Bundesbank‘s point of view “From my point of view, a clear end of net purchases would have been appropriate.”

(Weidmann's speech at German embassy in Paris on 27 October 2017) -

Basically, expansive monetary policy still appropriate as a consequence of the subdued inflation but extent and taken measures arguable.

-

Monetary policy will very probably remain expansive even after end of APP due to reinvestment of matured securities (no change in overall volume of securities held by ECB) …

-

…but pace of expansive monetary policy slower: reduction of purchase volumes of APP.

-

However, purchases of public sector securities remain area of concern, as they blur boundaries between monetary and fiscal policy.

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Thank you!

Gudrun Monika Moede Head of Representative Office Deutsche Bundesbank Marunouchi Building 13F, 2-4-1 Marunouchi, Chiyoda-ku Tokyo 100-6313 Tel.: +81 (0)3 3211 1581, Fax -1583 chief-rep@bundesbank.jp gudrun.moede@bundesbank.de Monika Moede 13/11/2017 page 18