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WHAT IS THE EUROSYSTEM DOING AND WHY? HOW FAR IS THE EUROSYSTEM READY TO GO? ULDIS RUTKASTE HEAD OF MONETARY POLICY DEPARTMENT
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EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

Apr 06, 2020

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Page 1: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

WHAT IS THE EUROSYSTEM DOING AND WHY? HOW FAR IS THE EUROSYSTEM READY TO GO?

ULDIS RUTKASTE

HEAD OF MONETARY POLICY DEPARTMENT

Page 2: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

2

45

47

49

51

53

55

57

59

III 2

01

3

V

VII

IX

XI

I 20

14

III V

VII

IX

XI

I 20

15

III V

VII

IX

XI

I 20

16

III

Developed Markets Emerging Markets

Euro area World

The global outlook remains weak, leading indicators show only subdued growth

Composite PMIs, s.a., diffusion index

Source: Markit, IMF

0

1

2

3

4

5

6

7

8

9

10

-6

-4

-2

0

2

4

6

8

10

Developed markets Emerging and developing economies

Global GDP growth, %

Page 3: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

3

Real GDP in euro area (growth rate, %, s.a.)

Source: Eurostat, ECB

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

I II III IV I II III IV I II III IV I II III IV I

2012 2013 2014 2015

yearly change

quaterly change

ECB has lowered the EA growth forecasts to 1.4% in 2016 and to 1.7% in 2017

1.4% 1.7% 1.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2016 2017 2018

March-2015 June-2015 Sept-2015

Dec-2016 March-2016

ECB real EA GDP projections

Page 4: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

4

Euro area inflation (% p.a.)

Source: Eurostat, ECB

Euro area inflation remains low, ECB keeps lowering the projections

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2012 2013 2014 2015 2016

Realized yoy HICP

ECB's target

ECB inflation projections (% p.a.)

0.1%

1.3% 1.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2016 2017 2018

March-2015 June-2015 Sept-2015 Dec-2016 March-2016

Page 5: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

5

Inflation swap implied 5y5y forward rate (%)

Source: Bloomberg

Market implied long term inflation expectations show deterioration

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016

Euro area

US

ECB's target

Page 6: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

6

Source: ECB

Eurosystem is responding to weak inflation outlook

Sep -2014 Jun - 2014

Jan-2015 Dec-2015 Mar-2016

0.15% 0.05% 0.05% 0.05% 0.00%

-0.1% -0.2% -0.2% -0.3% -0.4%

targeted long term refinancing operations (TLTRO) introduced with a maturity of up to 4 years

EA central banks start purchasing private sector assets (ABS, CBPP3)

EA central banks start purchasing public sector bonds, until September 2016

purchasing of government bonds extended until March 2017

private sector bond purchase program (CSPP) announced

government bond purchase program volumes raised from 60 bn to 80 bn per month

new long-term refinancing program announced (TLTRO II), central banks ready to pay money to commercial banks if they extend credit to the real economy

MRO

Depo

Un

con

ven

tio

nal

m

easu

res

Page 7: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

7

Eurosystem provides plenty of liquidity for the banking system

Standard

instruments

(MRO, ELA)

Bank liquidity

TLTRO ABSPP CBPP3 PSPP CSPP

Page 8: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

8

Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates

Source: ECB, Bloomberg

Since the beginning of 2014, the excess liquidity in Eurosystem has risen significantly

0 bn

100 bn

200 bn

300 bn

400 bn

500 bn

600 bn

700 bn

800 bn

900 bn

0 bn

100 bn

200 bn

300 bn

400 bn

500 bn

600 bn

700 bn

800 bn

900 bn Excess liquidity in Eurosystem

Announce negative rates and TLTRO

Lower rates further

Announce EAPP

Announce CSPP and lower rates further

Page 9: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

9

APP and its programs (EUR, bn)

0

500

1,000

1,500

2,000

09-2014 12-2014 03-2015 06-2015 09-2015 12-2015 03-2016 06-2016 09-2016 12-2016 03-2017

PSPP

ABSPP

CBPP3

Forecast period

APP

So far APP has been implemented smoothly, more boost to liquidity still to come

Souce: Bloomberg

APP TO

DATE

€918 bn

Page 10: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

10

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Forecast period

Total assets

Expected total assets

Eurosystem's balance sheet and expected developments (EUR, bn)

The APP was initially calibrated to help reaching Eurosystem’s total assets at ~ 3tn EUR by the end of the program. After March extension, this level will be exceeded by a significant margin

Souce: ECB

Eurosystem's TOTAL ASSETS TO DATE

€3.0 tn

Page 11: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

11

G4 central bank balance sheets – percent of GDP*

For BoE – last reported BS values at February 2015, since then BS value assumed to be constant

Source: Reuters, Fathom Consulting, BoL calculations

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

US

UK

EA

Japan

Eurosystem has caught up with Fed balance sheet in relative terms

Page 12: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

12

Main money market rates in euro area ( % p.a.)

Source: Bloomberg, ECB

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2012 2013 2014 2015 2016

EONIA Euribor 3M ECB deposit facility rate ECB marginal lending facility rate ECB refinancing rate

Expansionary monetary policy has contributed to a significant fall in interest rates

Page 13: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

13

Eonia forward curves derived from EUR OIS (%)

-0.50%

-0.25%

0.00%

0.25%

0.50%

0.75%

ECB GovC decision on APP (Jan.2015) ECB GovC decision on APP extention to March 2017 (Dec.2015) Last day (May 6, 2016)

Source: Bloomberg and Bank of Lativa calculations

Eonia futures have declined significantly

Page 14: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

14

German and US sovereign yield curves (% p.a.)

Source: Bloomberg

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

Germany (last) Germany (May'14) US (last) US (May'14)

The sovereign bond yields have decreased across the curve since the mid-2014

Page 15: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

15

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2012 2013 2014 2015 2016

Portugal

Italy

Spain

Slovenia

Ireland

France

Austria

Germany

10Y sovereign yields in EA (%)

-213

-183

-169

-168

-162

-153

-148

-140

-136

-136

-119

-98

-95

-250 -200 -150 -100 -50 0

IE

IT

SK

ES

BE

FR

NL

AT

FI

DE

UK

PT

USA

Yield change since June-2014 (bps)

Source: Bloomberg

Government borrowing has became cheaper especially in the peripheral countries

Page 16: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

16

Bank lending rates to NFCs (new business, % p.a.)

Source: ECB MIR, BoL calculations.

The sample of vulnerable countries includes CY, ES, GR, IE, IT, PT, SI

The decline in rates has been transmitted also to the retail borrowers

0.0%

1.0%

2.0%

3.0%

4.0%

2012 2013 2014 2015 2016

EA average Vulnerable EA countries* Other EA countries

2.6%

3.7%

2.1%

1.7% 2.0%

1.6%

0.0%

1.0%

2.0%

3.0%

4.0%

NFCs (EA) NFCs (Vulnerable

EA)

NFCs (other EA)

May-2014 March-2016

-1.7 -0.5 -0.9

Page 17: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

17

MFI lending to domestic households and non-financial corporations (annual growth rate, %, s.a., adjusted for sales and securitization)

Source: ECB

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

2012 2013 2014 2015 2016

HHs

NFCs

However, despite the extremely favorable financial conditions, rebound in lending is relatively slow

Page 18: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

18

MFI lending to domestic households and non-financial corporations (annual growth, %)

Source: ECB The sample of vulnerable countries includes CY, ES, GR, IE, IT, PT, SI

…and uneven across the EA

-10

-8

-6

-4

-2

0

2

4

2012 2013 2014 2015 2016

Yoy growth in the euro area vulnerable countries*

Yoy growth in the euro area countries with macro-financial stability

Yoy growth in the euro area

Page 19: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

19

Exchange rate of the euro against the US dollar (rhs) and interest rate differentials in % (lhs)

Source: Bloomberg and BoL calculations

EUR/USD is reflecting the monetary policy divergence between ECB and Fed

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2012 2013 2014 2015 2016

EUR/USD

USD 1Y1Y

EUR 1Y1Y

Page 20: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

20

Both stability and growth need 3 legs to stand on

20

Page 21: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

21

General Government debt (% of GDP)

Source: Eurostat

177

133 129

109 106 99 96 94

86 83 71

65 64 63 53

43 36

21 10

65

91

0

20

40

60

80

100

120

140

160

180

200 2007

2014

2015

EA '07

EA '15

The rapid increase in sovereign debt level raises serious concerns about its sustainability and future economic growth

Page 22: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

22

General Government budget balance (% of GDP)

Source: Eurostat, EC

-15.2 -13.9

-11.0 -9.8 -9.3 -8.9

-7.9 -7.2

-6.1 -5.6 -5.5 -5.5 -5.3 -5.3

-3.3 -3.0 -2.5

-0.5

0

-6.5

-1.6

-4.7 -4.4

-1.1 -1.6 -2.7

-3.8 -2.9

-0.7

-2.9 -1.8

-2.7 -1.4 -1.5

0.6

-3.1

0.6 0.4

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0 2009

2015

Budget deficit is still close or above the 3% threshold in several euro area countries

Page 23: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

23

Ease of doing business in 2015 (overall rank)

Increase in TFP achievable by moving the structural and institutional indicators towards best performers

Source: World bank, Doing Business, 2016. Top-3 in overall doing business are: Denmark, Singapore, New Zealand

Best performers in euro area on specific issues are: Ireland on doing business, Finland on governance, Estonia on employment protection.

Euro area economies would benefit substantially from addressing current structural weaknesses

Page 24: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning

24

Euro area HICP and swap-implied inflation path (% p.a.)

Source: Bloomberg, Bank of Latvia calculations

Eurosystem will reach its inflation target eventually, but it would be faster if supported by structural reforms

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

Realized yoy HICP

Swap-implied expected HICP path (last)

Potential HICP path with strong commitment to structural reforms

ECB's target

Page 25: EUROSYSTEM OW IS THE EUROSYSTEM READY TO GO · 2016-05-10 · 8 Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates Source: ECB, Bloomberg Since the beginning