NEWS Release - Panel on global monetary policies – similarities and differences on the way to the new normal - Remarks by Peter Praet, Member of the Executive Board of the ECB, at the GIC/SUERF/Deutsche Bundesbank Conference, Frankfurt am Main, 8 February 2018
One of the main features of central banks’ response to the crisis – and the threat it posed to their statutory objectives – was the deployment of additional monetary policy instruments.[1] Some of these instruments, such as asset purchases, had featured in the traditional toolkit of central banks in the early years of central banking before largely falling out of use in some parts of the world.
Others, such as forward guidance on the future direction of policy, were a more recent invention, but had been used with some regularity even before the crisis erupted in 2007. And some instruments, such as moderately negative interest rates, were more specific to certain jurisdictions. Overall, these measures have been very effective and helped set in train the synchronous expansion the global economy is currently experiencing.
As the global economy emerges from the greatest slump since the end of the Second World War, the focus is on calibrating the degree of monetary accommodation that is still required. In the United States, where real GDP returned to pre-crisis peak level back in 2011, the tightening cycle has been under way for some time. The Federal Reserve stabilised its monetary policy portfolio in October 2014 and started to raise the federal funds rate more than a year later. More recently, it has started to reduce its balance sheet.
In the euro area, the sovereign debt crisis meant that the cyclical recovery took considerably longer to materialise than across the Atlantic. Real GDP did not return to its pre-crisis peak level until 2015, four years later than in the United States.
Nevertheless, the euro area is currently experiencing a solid and broad-based economic expansion, with the economy in 2017 growing at its fastest pace for a decade. The very accommodative monetary policy measures we have taken since 2014 are judged to have had a significant impact on output growth. Looking ahead, real GDP growth is projected to remain consistently above potential growth in the coming years.
Despite these favourable developments, inflation continues to be lacklustre and to date is not receiving sufficient support from underlying inflationary pressures. While our measures have clearly played a decisive role in keeping inflation expectations anchored and have contributed to an improved inflation outlook, an ample degree of monetary accommodation therefore remains necessary to secure a return of inflation rates towards levels that are below, but close to, 2% over the medium term.
How is our monetary policy likely to evolve in the foreseeable future?
Our monetary policy stance is currently determined by the combination and mutual interaction of the asset purchase programme (APP), our policy rates and our forward guidance on each of these tools. Additional stimulus is provided by the targeted longer-term refinancing operations (TLTROs), which will remain outstanding for the next three years.
Once our key interest rates had reached exceptionally low levels, the APP became for all practical purposes the primary policy tool for calibrating our monetary policy stance. This is why, since January 2015, we have been signalling the traditionally tight connection between the ECB’s monetary policy and the price stability objective by linking an assessment of the medium-term outlook for inflation to the size and duration of our net asset purchases. Accordingly, we have consistently communicated our intention to continue with our chosen pace of monthly net purchases until we see “a sustained adjustment in the path of inflation consistent with our inflation aim”. In addition, the pledge to reinvest the proceeds from the principal payments that accrue from the maturing securities in our portfolio should be seen as a necessary complement to the net asset purchases.
Forward guidance on both policy rates and the APP plays a key role in determining our monetary policy stance. Its function has evolved significantly over time. In July 2013, when we announced for the first time that we expected our “key interest rates to remain at present or lower levels for an extended period of time”, forward guidance on interest rates was intended as a protective measure to insulate the euro area money market from the global financial turmoil that had followed the “taper tantrum” a few weeks earlier.
As the macroeconomic environment deteriorated in late 2013 and early 2014, our policy needed to become distinctly more accommodative, and forward guidance turned into a vehicle for easing the monetary policy stance. Forward guidance has not taken the same form across all major economies, differing in terms of both its degree of conditionality and the instruments to which it is attached
In the euro area, since the APP has been in place, forward guidance has been extended to key parameters of our purchases and has helped investors form expectations about the size of the APP and its duration. In particular, we have indicated a minimum horizon – an intended end-date – until which time we plan to carry out net monthly purchases, while retaining the option of extending the programme beyond that intended end-date if the “sustained adjustment” condition has not been met.
The mutually reinforcing nature of our forward guidance on policy rates and the APP became even more evident in March 2016, when the Governing Council clarified the future sequencing of these two instruments. By stating that policy rates were expected to remain at present levels “well past the horizon of our net asset purchases”, the Governing Council made it clear that keeping policy rates well anchored for the entire lifespan of the asset purchases was an enabling condition for the purchases to exert their full impact.
Looking ahead, monetary policy will evolve in a data-dependent and time-consistent manner. The transition towards policy normalisation will begin once the Governing Council judges that there is a sustained adjustment in the path of inflation. This assessment will be based on three criteria for the inflation outlook: convergence, confidence and resilience.
Copyright: European Central Bank
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