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The Macroeconomic Impact of Quantitative Easing in the Euro Area

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The Macroeconomic Impact of Quantitative Easing in the Euro Area Deutsche Bundesbank Monthly Report June 2016 29 The macroeconomic impact of quantitative easing in the euro area Against the backdrop of subdued inflation prospects and falling market- based inflation expect- ations at the zero lower bound on interest rates, the ECB Governing Council introduced an asset purchase programme (APP) in March 2015 and has since expanded this on multiple occasions. The declared aim of this programme is a sustained adjustment in the path of inflation towards inflation rates of below, but close to, 2% over the medium term. As the euro area has no experience, to date, with the effectiveness of quantitative easing of this kind on real economic developments and inflation, model-based analyses play an important role in evaluating these non-standard monetary policy measures. The simulations presented in this article show that the various model approaches differ consider- ably in terms of how they evaluate the effectiveness of quantitative easing on macroeconomic developments and inflation. Nevertheless, they bear out the experience of other currency areas – namely that, all other things being equal, quantitative easing can have an expansionary effect on aggregate demand and inflation. In addition to those effects of quantitative easing intended by the ECB Governing Council, there is, however, also the potential for unwanted side effects. These include an increasing nexus between monetary and fiscal policy, risks relating to the profitability of financial institutions and an excessively high propensity to run risks. The longer the highly accommodative stance remains in place, the more likely its side effects are to deepen. This is why monetary policy, which is currently using expansionary measures in a bid to lift inflation from its very depressed level, must usher in the normalisation of monetary policy once it reaches a price path that is compatible with the Eurosystem’s stability target – irrespective of the state of public finances or financial stability . Deutsche Bundesbank Monthly Report June 2016 30 Non- standard Eurosystem In January 2015, the Eurosystem finally an- January 2015: nounced the introduction of the expanded quantitative measures since mid-2014 easing asset purchase programme (APP) in order to announced (APP launched Eurosystem’s Since 2007, the Eurosystem has adopted a further loosen its monetary policy stance. The in March) resolute range of non- standard measures to counteract majority of the ECB Governing Council deemed response to the financial crisis the impact of the banking, financial and sover- this measure necessary as the inflation fore- eign debt crisis. Prior to June 2014, its primary casts and measures of market participants’ objective was to safeguard the functioning of long- term inflation expectations had fallen fur- the monetary policy transmission process.1 The ther despite the many measures taken. How- remaining scope for policy rate cuts increas- ever, survey- based inflation expectations do ingly became an issue during 2014 (see the not back up this decrease, which can be taken chart below)2 and, with inflation prospects sub- as a sign that the decline in market- based ex- dued and market- based inflation expectations pectation measures could be related to an in- falling, a series of new non- standard measures creasingly negative inflation risk premium (see was therefore gradually adopted from June the chart on page 32). 2014 onwards with the aim of achieving a more accommodative monetary policy stance (see the chart on page 31). 1 The non- standard measures implemented prior to June 2014 included the following asset purchase programmes: September 2014: In June 2014, the Eurosystem announced the the covered bond purchase programme (CBPP1, July 2009 to June 2010, and CBPP2, November 2011 to October ABSPP and introduction of targeted longer- term refinan- CBPP3 launched 2012), the securities markets programme (SMP, May 2010 cing operations (TLTROs). These allow banks to to September 2012) and, lastly, outright monetary transac- tions (OMT, as of September 2012; no purchases to date). borrow from the Eurosystem at fixed interest 2 This applies not only to the euro area but also to other rates for a period of up to four years in a series currency areas. 3 Importantly, the amounts that banks can borrow were of eight operations conducted at quarterly linked, for the first two TLTROs, to their stock of eligible intervals starting in September 2014.3 In Sep- loans (loans to euro- area non- financial corporations and households, excluding loans to households for house pur- tember 2014, the Eurosystem also announced chases) as at 30 April 2014, while, for the remaining six the launch of two further asset purchase pro- operations, the evolution of eligible lending since May 2014 is key. The interest rate on the first two TLTROs was grammes: the asset-backed securities purchase set at a ten basis point spread over the main refinancing programme (ABSPP) and the third covered rate prevailing at the time when each TLTRO was con- ducted. This spread was eliminated for the remaining six bond purchase programme (CBPP3). TLTROs. Central bank interest rates % United States 7 (Federal funds target rate) 6 United Kingdom 5 (official bank rate) 4 3 Euro area (minimum bid rate/main 2 refinancing rate) Japan 1 (uncollateralised overnight call rate 1) 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Respective central banks. 1 Uncollateralised overnight call rate target until 18 March 2001. Overnight call rate determined in- directly from the outstanding balance of the current accounts at the central bank as an operating target from 19 March 2001 to 8 March 2006 before returning to the overnight call rate target. Reintroduction of monetary base control from 4 April 2013. Deutsche Bundesbank Deutsche Bundesbank Monthly Report June 2016 31 Chronology of selected Eurosystem monetary policy measures since 2014 5 June 2014 – Interest rate cut: MROs1 to 0.15% and deposit facility to – 0.10% – Full allotment until at least the end of 2016 4 December 2014 – TLTROs 1: starting in September 2014, – Announcement: ECB 8 operations (quarterly), 2 October 2014 Governing Council maturity of up to 4 years, announces intention that partly tied to lending, – Details concerning TLTROs, ABSPP and CBPP3 interest rate: MRO rate ABSPP/CBPP3: minimum should move balance + 10 basis points maturity of 2 years, sheet towards the 9 March 2015 – ABS 1 purchase programme exemption for Greece dimensions it had at “under development” and Cyprus the start of 2012 – APP 1 is launched 2014 2015 4 September 2014 6 November 2014 22 January 2015 – Interest rate cut: MROs – Announcement: – TLTROs: to 0.05% and deposit ECB Governing Council 10 basis point facility to – 0.20% expresses expectation spread over MRO – ABSPP 1/ CBPP3 1 that TLTROs, ABSPP and rate eliminated adopted: to start CBPP3 will move balance – APP 1 adopted: besides in October sheet towards the ABSPP and CBPP3, APP dimensions it had at will include government the start of 2012 bond purchases (PSPP)1 from March onwards – Intention: €60 billion per month until September 2016 (€1,140 billion) 10 March 2016 – APP adjustments: 3 December 2015 monthly purchases expanded by – APP adjustments: €20 billion to programme €80 billion (+€240 billion), extended inclusion of bonds to March 2017 issued by non-bank (+€360 billion), corporations, reinvestment of issue share limit principal payments, for “supras” raised inclusion of debt from 33% to 50% 3 September 2015 instruments issued – Interest rate cut: by regional and local MROs to 0% and governments – APP adjustment: deposit facility to – 0.40% PSPP issue share limit – Interest rate cut: – TLTRO II: raised from 25% to 33% deposit facility operations from in individual cases to – 0.30% June 2016 (quarterly), (except where the – Full allotment until maturity of 4 years fixed Eurosystem would have at least the at the MRO rate, including a blocking minority) end of 2017 “reward component” 2015 2016 22 October 2015 21 January 2016 – Announcement: – Announcement: ECB Governing Council ECB Governing Council emphasises that its mon- emphasises that its mon- etary policy stance will be etary policy stance will re-examined in December be reviewed and possibly reconsidered in March 1 MROs: main refinancing operations; TLTROs: targeted longer-term refinancing operations; ABS: asset-backed securities; ABSPP: as- set-backed securities purchase programme; CBPP: covered bond purchase programme; and APP: expanded asset purchase programme; PSPP: public sector purchase programme. Deutsche Bundesbank Deutsche Bundesbank Monthly Report June 2016 32 Long-term inflation expectations in the euro area %, daily data 2.8 2.6 2.4 2.2 2.0 1.8 1.6 Inflation swaps, five-year forward rate five years ahead BEIR,1 (GDP-weighted) five-year forward rate five years ahead 1.4 Consensus forecasts, annual average in six to ten years Survey of Professional Forecasters, annual average in five years 1.2 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: ECB, Consensus Economics, Thomson Reuters, EuroMTS and Bundesbank calculations. 1 Breakeven inflation rate (BEIR) = dif- ference between the yield on a nominal bond and the yield on an inflation-linked bond of the same maturity. Deutsche Bundesbank The APP marks the start of quantitative easing in the euro area as, in addition to ABSPP and CBPP3, which were introduced prior to this, its chief component is the comprehensive pur- chase of public sector securities (public sector purchase programme, or PSPP). Initially, total APP purchases were to amount to €60 billion a month until the end of September 2016, or be- 4 The individual components of the APP take differing yond, if necessary, and, in any case, until a sus- forms with respect to risk- sharing. The ABSPP, CBPP3 and, tained adjustment was seen in the path of in- as of March 2016, the corporate sector purchase pro- gramme (CSPP) are subject to full risk- sharing.
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