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Ii. Monetary Policy of the Eurosystem 7

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Ii. Monetary Policy of the Eurosystem 7 II. MONETARY POLICY OF THE EUROSYSTEM 7 The Eurosystem continued implementing very accommodative The Governing Council judges that inflation is not yet monetary policy and announced its plans to keep it in place for an sustainable enough and, therefore, continues to maintain exceptionally low key ECB interest rates. extended period of time. The Eurosystem continued to maintain policy Chart 5. ECB deposit facility, MRO interest rates and interest rates at low levels and stated that they would remain at their present inflation levels for an extended period of time, and well past the horizon of the Percentages expanded asset purchase programme (APP). 6 In March 2018, the Governing Council made changes to its forward 5 guidance as regards the scope of the expanded APP, removing the 4 reference that monthly purchases of debt securities can be increased 3 in the future. This decision was determined by the ECB Governing Coun- 2 cil’s greater confidence that financial conditions and the balance of risks 1 surrounding the euro area growth outlook will not see significant deteriora- 0 tion in the future. This confidence was reinforced by the fact that in March –1 2018 euro area economic growth projections were once again revised 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 MRO interest rate upwards, whereas inflation projections suggested that price growth is more Deposit facility interest rate likely to converge towards the ECB’s inflation aim over the medium term. Annual change of HICP Source: Thomson Reuters Datastream. The Governing Council reiterated, however, that the duration of the APP may, if necessary, be extended. Moreover, the Governing Council continues The strongest downward effect on the yields of euro area government debt securities from the expanded to state that the key ECB interest rates will remain unchanged at their APP occurred before its announcement, since present low levels for an extended period of time, and well past the horizon financial markets priced-in the growing probability that the ECB would resort to non-standard monetary of the expanded APP. policy instru-ments to asset prices. Later, a large share of fluctuations was also driven by other factors. The Eurosystem continued to implement the expanded APP Chart 6. Annual yields on 10-year euro area government smoothly. Since the beginning of 2018, the expanded APP has been bonds issued in national currency carried out according to the parameters of the quantitative easing scheme Percentages amended in October 2017, i.e. the monthly pace of debt securities purchas- 6 es has been reduced from €60 billion to €30 billion. The expanded APP is 5 expected to run for a total of 43 months – at least until the end of September 4 2018, with the overall scope of €2.6 trillion. Asset purchases made under 3 the programme by the end of April 2018 amounted to a total of €2.4 trillion. 2 The amount of debt securities purchased by the Eurosystem under the 1 public sector purchase programme (PSPP) totalled €2.0 trillion, which 0 –1 accounts for 82% of the total assets already purchased under the expanded 2013 2014 2015 2016 2017 2018 APP. Euro area average Germany France The Bank of Lithuania has continued to contribute to the implemen- Italy Spain tation of the Eurosystem’s expanded APP in a proportionate manner, Lithuania as have done other national central banks of the euro area. By the end Sources: ECB and Thomson Reuters Datastream. of April 2018, the Bank of Lithuania had purchased debt securities under the Note: As regards the yields of government debt securities of the Republic PSPP totalling €9.9 billion. Debt securities issued by supranational Europe- of Lithuania, until 31 January 2018 – Bank of Lithuania calculations, afterwards – ECB data. an institutions accounted for the majority of those purchases. The rest were Favourable funding conditions encourage lending to the government debt securities of the Republic of Lithuania. These had the real sector in the euro area and Lithuania. been purchased by the Bank of Lithuania in tandem with the ECB for a total Chart 7. Dynamics of the amount of MFI loans to house- of €2.8 billion by the end of April. The current amount of government debt holds and non-financial corporations in the euro area and securities of the Republic of Lithuania purchased by the Bank of Lithuania Lithuania and the ECB is equal to that of purchases as of October 2017 because in Annual percentage change February 2018 the Government redeemed a large debt issuance, a part of 12 which had been purchased by the Bank of Lithuania and the ECB. Given 8 that the total amount of bonds issued by the Government of the Republic of 4 Lithuania is smaller than the Eurosystem is ready to purchase under the 0 expanded APP, the Bank of Lithuania and the ECB acquired new govern- –4 ment debt securities only in the amount required to offset the February –8 reduction. Additional planned debt securities were acquired by the Bank of 2013 2014 2015 2016 2017 2018 Lithuania under the expanded APP as usual, by purchasing more debt To households in the euro area securities issued by European institutions. To non-financial corporations in the euro area ECONOMIC REVIEW / June 2018 To households in Lithuania The cost of borrowing in capital markets for euro area governments To non-financial corporations in Lithuania and businesses is somewhat higher than it was in November 2017. As Sources: ECB and Bank of Lithuania calculations. a result of brighter expectations about the euro area growth outlook and Note: Adjusted for sales and securitisation. LITHUANIAN greater confidence that interest rates of major global central banks will rise Funding conditions for non-financial corporations at a faster pace in the future, the average yield of 10-year euro area gov- have remained very favourable thanks to the accom- 8 modative monetary policy measures applied by the ernment debt securities showed an upward trend from November 2017 to Eurosystem. the middle of February 2018. Later, due to various factors, namely price Chart 8. Average interest rate on new MFI loans to non- adjustments in global equity markets, increased geopolitical unrest and financial corporations somewhat worse early activity indicators of the euro area, those expecta- Percentages tions diminished, thus, the yields of government debt securities declined 7 slightly. In May, the yields of government debt securities of Italy and other 6 peripheral euro area countries started increasing due to uncerntainty arising 5 in the course of formation of Italy’s ruling coalition.The yields of debt securi- 4 ties issued by euro area corporations were in line with the yields of govern- 3 ment debt securities and they are also higher than they were in November 2 2017 (investment grade securities – by 39 basis points, and high-yield 1 bonds – by 97 basis points). 0 2013 2014 2015 2016 2017 2018 Dispersion across the euro area countries The Eurosystem’s accommodative monetary policy measures have In the euro area contributed to the continued growth of bank lending in the euro area In Lithuania and Lithuania. It should be noted, however, that loan growth in Lithuania is Sources: ECB and Bank of Lithuania calculations. currently more driven by demand factors, namely increasing business Note: 3-month moving average. investment and rising wages. 1 Since November 2017, lending to the private non-financial sector in the euro area has been gradualy accelerating. The Although interest rates on new loans for house loan portfolio in Lithuania continues to expand at a faster pace compared to purchase in the euro area and Lithuania have been 2 largely stable for some time, they remain very the euro area. Starting in November 2017, the average interest rates on favourable thanks to the Eurosystem’s accommoda- new loans to non-financial corporations have followed different trends in tive monetary policy measures. Lithuania and the euro area, with the interest rates going up in Lithuania (by Chart 9. Average interest rate on new MFI housing loans 41 basis points) and decreasing slightly further in the euro area (by 3 basis Percentages points). In the meanwhile, the average interest rates on new housing loans 7 in both Lithuania and the euro area have fluctuated marginally (up by 9 6 basis points in Lithuania and down by 3 basis points in the euro area). 5 Overall, the level of interest rates on new loans has remained the lowest on 4 record in the euro area and very low in Lithuania. 3 2 Very accommodative monetary policy pursued by the Eurosystem 1 continued to exert a positive influence on macroeconomic develop- 0 ments in the euro area and Lithuania. ECB experts estimate that between 2013 2014 2015 2016 2017 2018 2016 and 2020 the Eurosystem’s large-scale accommodative monetary Dispersion across the euro area countries In the euro area policy will add 1.9 percentage points to the rates of both economic growth In Lithuania and inflation in the euro area. The positive effect of the Eurosystem’s Sources: ECB and Bank of Lithuania calculations. accommodative monetary policy on the Lithuanian economy mostly works Note: 3-month moving average. through the tradeable sector, in particular as stronger demand in the euro area and the marked depreciation of the euro already before the an- nouncement of the expanded APP have opened up more possibilities for our country’s exports. The Bank of Lithuania estimates that thanks to the ac- commodative monetary policy the rates of domestic real GDP growth and inflation will increase by 1.0 percentage points and 1.3 percentage points respectively between 2016 and 2019.
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